Govt bond yields may soften slightly as inflation falls below forecast

Government bond yields are expected to open marginally lower on Tuesday following a lower-than-expected domestic headline inflation print for July. Consumer Price Index (CPI) inflation was at 3.5 per cent in July, which was lower than the market expectation of 3.8 per cent.

The yield on the benchmark 10-year government bond settled at 6.88 per cent on Monday.

The market now eyes the US inflation data scheduled to be released on Tuesday after market hours.

“Today’s inflation print was lower than market consensus and could lead to some gains in government bonds at the open tomorrow (Tuesday). However, a bigger factor driving domestic yields is likely to be the US CPI release tomorrow and any change in rate cut expectations by the Fed due to the inflation print,” said Sakshi Gupta, Principal Economist at HDFC Bank.

Market participants expect the benchmark yield to open around 6.85 per cent on Tuesday. The bond market will require stronger cues for the yield to soften below 6.85 per cent, given the technical resistance, they said.

“The lower inflation print, coupled with lower industrial growth data, will be positive for the bond market. The yield (benchmark yield) will open lower at around 6.85 per cent. There will be resistance around 6.85 per cent (yield on the benchmark bond),” said V R C Reddy, head of treasury at Karur Vysya Bank.

Food inflation fell to 5.4 per cent in July due to the base effect. Vegetable prices were also lower at 6.8 per cent. Industrial growth for the month came in at 4.2 per cent, lower than the market expectation of 4.5 per cent.

According to the Reserve Bank of India’s (RBI) estimate, headline inflation is expected to average around 4.4 per cent in the second quarter of the financial year, which means that the 4 per cent mark will be crossed in the next two months. Food inflation is expected to be the major reason for the rise in inflation.