Softer core inflation data drives India 10-year bond yield to 4-month low

Indian government bond yields declined on Monday, with the benchmark 10-year bond yield dropping to a four-month low as a softer core inflation reading led to bets of easing inflationary pressures in the coming months.
 

The benchmark 10-year yield was at 7.1430 per cent at 5 p.m. IST, versus its previous close of 7.1791 per cent.

The central bank extended bond market trading until 5:45 p.m., from 5 p.m., traders said, citing a likely delay in publishing of debt switch results as a probable reason.
 

India's annual retail inflation rose 5.69 per cent on-year in December from 5.55 per cent in November amid higher food prices, but the reading was lower than a Reuters poll of 5.87 per cent.
 

However, economists estimated core inflation at 3.8 per cent-3.89 per cent, compared to 4.05 per cent-4.2 per cent in November, while ICICI Securities Primary Dealership pegged it at an over four-year low of 3.76 per cent.
 

"The fall in core inflation has been quite telling, and it can go even lower if the weak sequential momentum continues, reflecting the RBI's victory over price pressures," said ANZ economists Dhiraj Nim and Sanjay Mathur.
 

"If food disinflation proves to be satisfactory and the RBI's inflation projections begin to show an alignment of future inflation to 4 per cent, we see the possibility of an earlier and deeper rate cutting cycle."
 

A sustained fall in core retail inflation and subdued inflationary pressures could prompt the Reserve Bank of India's rate-setting panel to ease its policy stance to 'neutral' as early as next month, economists have said.
 

The monetary policy committee has kept repo rate unchanged since April 2023, after raising it by 250 bps between May 2022 and February 2023 to battle high inflation.
 

U.S. yields eased last week after December producer prices data fell unexpectedly, raising bets of an early interest rate cut by the Federal Reserve.
 

The 10-year yield eased 9 basis points last week, ending at 3.95 per cent on Friday, after rising 18 bps in first week of January. U.S. markets are closed on Monday for a holiday.
 

The odds of a rate cut by the Fed in March rose to 73 per cent from 68 per cent last week, according to the CME FedWatch tool.