bonds
The 10-year bond yields climbed to a three-month high after a higher-than-expected consumer price inflation, stoking the possibility of further rate hikes by the Reserve Bank of India.
The 10-year bond yield was trading at 7.397 percent, which is a level last seen on November 1, 2022, and is up 4 basis points from its previous close of 7.365 percent. It is important to note that bond yields and prices move in opposite directions. The rupee opened higher against the US dollar at 82.59, an increase of 0.16 percent from its previous close.
In January, consumer price inflation hit a three-month high of 6.52 percent, compared to 5.72 percent in December, driven by a significant increase in cereal prices and stickiness of core inflation.
Nomura Research reports that the higher-than-expected January inflation is a negative surprise, reflecting upward pressure in the food basket, but also partly due to higher core inflation.
Analysts now anticipate that core inflation will likely remain stubborn in February and March, and the repo rate, which was increased by 25 basis points to 6.5 percent in the latest monetary policy review, may see a similar increase either in April or later.
“Still, core inflation was broadly flat, providing some reprieve. The RBI’s hawkish rhetoric was a surprise for the market last week, but its position has been validated. We see greater risks of another rate hike in April,” Barclays India said in a note to investors.
After a two-month break, retail inflation has returned to the 6-percent-plus territory, and CPI inflation has now been above the medium-term target of 4 percent for 40 months in a row.
According to analysts, headline inflation is expected to remain at its January levels through February, and core inflation is expected to decrease slightly but remain around 6 percent. Initial data for February shows that vegetable prices are likely to diverge with tomato, onions, and potatoes contracting, while overall vegetable prices increase.
Nomura’s current perspective is that although the April MPC meeting is taking place, the RBI will likely take a break in April and in the coming months. There may be a cycle of interest rate reductions in October due to lower-than-anticipated growth and inflation, resulting in a total of 75 basis points in rate cuts during the second half of FY24.
Investors are anticipating the latest US inflation figures amid concerns about potential interest rate hikes following their release this week.
