Indian Government Bonds Slip as Traders Book Profits
The Indian government bonds slipped early in the session on Thursday as traders booked profits. This move pushed bond bulls to the sidelines after the central bank’s latest meeting minutes showed a relatively dovish tone. The yield on the benchmark 10-year note was at 6.4921% as of 10:00 a.m. IST, after closing at 6.4799% on Wednesday. Bond yields move inversely to prices.
Market Expectations
Market participants were anticipating the benchmark yield to hit a key technical level of 6.47% in Thursday’s trade. However, the yield rose instead, causing a surprise among traders. "We were anticipating profit booking, but it would be right from the start is a bit of a surprise, especially after the minutes have further strengthened bets of a rate cut in December," a trader with a primary dealership said.
Central Bank’s Meeting Minutes
The minutes of the October meeting showed that members of India’s interest-rate panel flagged room for future rate cuts as the country’s inflation outlook eases. Reserve Bank of India Governor Sanjay Malhotra said in the minutes, "The benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth."
Interest Rates and Inflation
Earlier this month, the RBI held interest rates, while two members of the rate panel favoured a change in stance to "accommodative" from "neutral". India’s retail inflation dropped to an eight-year low of 1.54% in September, supporting the call for a rate cut in December. While most economists project just a December rate cut, some expect the central bank to lower the rate by 25 bps in February as well.
Economic Projections
Barclays said the most opportune time to deliver a rate cut is December, instead of delaying it any further. "We expect July-September CPI inflation to modestly undershoot RBI’s Q2FY25-26 CPI inflation estimate and track October CPI inflation at 0.5%," the bank said.
RATES
India’s overnight index swaps (OIS) witnessed paying pressure in line with the rise in bond yields. The one-year OIS rate was at 5.45%, while the two-year rate was at 5.38%. The five-year rate was at 5.61%.
Conclusion
In conclusion, the Indian government bonds slipped as traders booked profits, pushing bond bulls to the sidelines. The central bank’s meeting minutes showed a relatively dovish tone, strengthening bets of a rate cut in December. With India’s retail inflation at an eight-year low, the stage is set for a potential rate cut in the upcoming months. Economists and market participants will be closely watching the RBI’s moves, and the bond market is expected to remain volatile in the near term.
