India bonds rise on short covering after inflation data

MUMBAI: Indian government bonds rose on Thursday, as traders unwound their short positions after a January inflation reading that was lower than the market had feared.

The 10-year 6.48% 2035 bond yield settled at 6.6833%, compared with 6.7088% on Wednesday.

India’s consumer inflation accelerated for a third straight month to 2.75% in January under a new series, versus 1.33% in December under the old base year of 2012.

It’s the first reading under a new price series that lowers the weighting of volatile food prices, while moving the base year to 2024 from 2012.

This is also the first time since August that inflation returned within the central bank’s 2%–6% target band.

“Some participants were pegging inflation under the new series at 3%, so a lower (than expected) reading led to some short-covering,” a trader at a primary dealership said.

“A close below 6.70% is positive for bonds, but tomorrow’s auction will decide if the levels will sustain.”

The Reserve Bank of India had also raised its inflation projection for the current financial year to 2.1% from 2.0% at its February policy meeting, while leaving the repo rate unchanged.

“CPI inflation for the next year is likely to align with our forecast at 4% year-on-year, characterised by a pick-up in the food component, partly due to base effects,” DBS bank wrote in a note.

With inflation expected to rise going forward, the RBI’s rate easing cycle seems nearly over, traders said. Bond yields had edged higher early in the session, tracking a surge in U.S. Treasury yields on reports stating non-farm payrolls increased by 130,000 jobs versus 70,000 jobs in January following a downwardly revised 48,000 rise in December.

Rates

India’s overnight index swap rates eased in line with bonds.

The one-year OIS rate ended 2 bps lower at 5.5050% and the two-year rate fell 3.5 bps to 5.64%. The five-year OIS rate was 5 bps down at 6.09%.