Bond yields ease tracing lower than expected May inflation data

14 Jun 2013 Evaluate

Pre WPI data Scenario:

Bond yields eased in early deals tracing a stronger rupee and higher US treasuries. However, yields will likely be biased up as the Reserve Bank of India is unlikely to cut rates as the recent sharp rupee fall has sparked renewed concern about the current account deficit. Meanwhile, the yields gyrated in range-bound for today’s trading session as dealers awaited headline inflation, which probably held near the central bank's comfort level of 5 per cent last month.

On the global front, US Treasuries were firm in Asia on Friday as traders took the view that any end to the Fed's bond buying programme will be gradual and that no rates hikes were imminent. Meanwhile, Brent futures slipped on Friday from near $105 a barrel with ample US inventories and a poor demand outlook weighing on prices, after bouncing more than 3 percent in the last two sessions off this week's low.

Back home, the yields on 10-year 7.16% - 2013 bonds were trading 1 basis point lower to 7.32% from its previous close of 7.33% on Thursday.

The benchmark five-year interest rate swaps were trading 1 basis point lower at 7.00% from its previous close of 7.01% on Thursday.

Post WPI data Scenario:

In a sharp reaction to the surprisingly lower inflation figures for May, bond yields edged lower on enlarged rate cuts hopes. Lower industrial growth and inflation data, strengthens the case for rate cut in RBI’s monetary policy slated next week.

Providing RBI the much needed room for slashing rates, India's main inflation gauge, surprisingly slowed down further to 4.7% for the month of May, as compared to 4.89% (Provisional) for the previous month of April, which was its lowest level since 2009.

The yields on 10-year 7.16% - 2013 bonds were trading 1 basis point lower to 7.32% from its previous close of 7.33% on Thursday.

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