India Bonds Fall On Profit Taking As Crude Prices Trend Higher

Thursday,   14-Feb-2019   10:20 AM (IST)

Indian government bonds fell in thin early trade as investors booked profits after yesterday’s rally and as a consistent rise in crude oil prices hurt appetite. The benchmark 7.17% bond maturing in 2028 changed hands at 97.93 rupees, yielding 7.49%, at 10:05 a.m. in Mumbai against 98.09 rupees, and a 7.47% yield, yesterday. The benchmark yield fell by six basis points yesterday as inflation slipped to a 19-month low in January, raising hopes of another policy rate cut in April. The 7.26% 2029 bond was trading at 99.64 rupees, yielding 7.31%, against 99.77 rupees, and 7.29% yield, yesterday. Crude oil prices rose for a third session, with the benchmark Brent crude oil contract hitting the highest in nearly three months, amid optimism over resolution of trade issues between U.S. and China. Prices of the commodity were also supported as Saudi Arabia said that it will cut output further in coming months, while U.S. sanctions against Iran and Venezuela may further lead to supply reduction. The Brent crude contract was 0.4% higher at $63.83, after gaining 1.9% and 1.5% in last two sessions. India imports about 80% of its crude oil requirements. Traders eye the heavy debt supply in the coming months. India will borrow an additional 360 billion rupees in March through bonds, taking the gross supply for this year to 5.71 trillion rupees. The government has planned a gross borrowing of 7.10 trillion rupees in the next fiscal, with net borrowing at 4.73 trillion rupees. States are also scheduled to raise at least 1.05 trillion rupees by March end. India’s retail inflation - a key price gauge for the Monetary Policy Committee - has stayed below the central bank’s medium-term target of 4% for the sixth straight month.  Last week, the MPC cut the key policy interest rate by 25 basis points to 6.25% as it expects inflation to stay below target over the next year despite New Delhi’s expansionary fiscal proposals. Most brokerages are expecting a rate cut in April.  Retail inflation rate eased to 2.05% in January from a year earlier, the slowest pace of expansion since June 2017.  The Reserve Bank of India will purchase bonds worth up to 125 billion rupees today. The RBI plans to conduct open market purchases worth another 250 billion rupees in February. However, traders are skeptical whether the pace of note purchases would sustain in the next financial year that starts Apr. 1.