Bond Yields Rise As February Rate Cut Remains Uncertain
Bond yields rise on reduced hopes of a February rate cut as commodity price inflation rises
Bond yields rose for the second consecutive session on Monday with views divided on whether inflation data for December would provide enough reason for another rate cut from the Reserve Bank of India in February.
Wholesale price inflation rose to 3.39 percent in December compared to 3.15 percent in November, showed data released by the government on Monday. Inflation rose in the fuel and power segment along with the mining segment, where global prices have been on the rise. Higher commodity prices could eventually feed in to manufactured goods inflation and core inflation, which the RBI tracks closely.
The yield on the benchmark 10-year government bond rose 3 basis points to 6.44 percent from its previous close of 6.41 percent on Friday. It touched a high and low of 6.44 percent and 6.41 percent respectively.
With no visibility of inflation coming down in the near future, Reserve Bank of India may adopt a wait and watch mode in the February monetary policy review and may lower interest rates only in April after taking into consideration the global environment and domestic inflation trajectory. We expect yields to stay in the range of 6.35-6.50 percent in asubdued environment until the next big trigger, i.e. the Union Budget.Mahendra Jajoo, Head Fixed Income, Mirae Asset Global Investment (India) Pvt. Ltd
Economists are starting to pencil in a deficit of between 3-3.5 percent for fiscal 2018. While the government has a target to reduce the fiscal deficit to 3 percent of GDP by fiscal 2018, a committee reworking the fiscal responsibility framework is likely to give the government greater flexibility.
Bank of America-Merrill Lynch (BofA-ML) expects a fiscal deficit of 3.5 percent for the next fiscal and adds that this necessary to support growth.
“Given that growth is stagnating at about 4.5% in the old GDP series, we have always believed that the Center should relax the fiscal deficit to combat a global recession that could prove to be longer than the Great Depression,” said BofA-ML in a report on Monday.
