Bonds strengthen and rupee flat after favourable US inflation data

Indian government bond prices strengthened on Thursday, tracking the fall in US Treasury yields, which fell after US inflation data was lower than expected. The supportive domestic inflation data further aided the bond market.

The yield on the benchmark 10-year government bond settled at 6.99 per cent on Thursday, against 7.01 per cent on Wednesday. Bond yields and bond prices are inversely correlated.

“Our market is acting like a derivative to the US yields,” said a dealer at a state-owned bank. “The US Federal Reserve meeting outcome was hawkish, but the market is only focusing on the data,” he added.

The 10-year US Treasury yield fell by 8 basis points to 4.32 per cent on Thursday.

Meanwhile, the rupee remained steady throughout the day. The local currency settled at Rs 83.55 per dollar, flat versus Wednesday.

“Even after volatility witnessed in the dollar index, due to CPI data and the Fed's policy decision, the rupee was seen as resilient against the dollar. Now the trend in the rupee will remain range-bound, but the undertone remains weak as rupee consolidation continues near an all-time low," said Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities. Only a major fall in the dollar index to below 103 (from 104.25 currently) will lead to strong rupee buying above Rs 83.00. Till then, we could see the rupee in the 83.20–83.75 per dollar range," added Trivedi.

Back in March, US Federal Reserve officials were expecting a 75-basis-point rate cut for 2024. Now, they're only predicting a 25-basis-point reduction, according to the latest median projections. Meanwhile, the US Consumer Price Index (CPI) didn't budge in May, contrary to economists' predictions of a 0.1 per cent increase and down from a 0.3 per cent rise in April. On a yearly basis, US CPI climbed 3.3 per cent, just below both the previous month's and analysts' expectations of 3.4 per cent.

On the domestic front, the decline in CPI inflation to 4.75 per cent in May indicated that disinflation in India is progressing gradually. The core inflation also declined to 3.1 per cent, further aiding sentiments. Market participants said that the downward trajectory of inflation might potentially allow the domestic rate-setting panel to implement rate cuts sooner than anticipated.

Currently, the earliest rate cut is seen only in the last quarter of the current financial year.