MUMBAI: Indian government bond yields are expected to trend marginally lower on Thursday, mirroring similar moves in US Treasury yields, as the Federal Reserve maintained it still hopes to cut rates even as it highlighted recent elevated inflation readings.
The benchmark 10-year yield is likely to move in a 7.16%-7.21% range, following its previous close of 7.1855%, a trader with a primary dealership said.
“There have been no surprises from the Fed, and even the commentary seems to be largely similar, but the fact that they are still eyeing rate cuts has supported Treasuries, and should lead to some intermittent buying locally,” the trader said.
US yields eased on Wednesday after the Fed decision, as the Fed was less hawkish than what many market participants had heard and also practically ruled out any further rate hikes.
India bonds not reacting to strong domestic growth, yields little changed
The 10-year yield was around the crucial 4.60% mark, while the two-year yield, a closer indicator of interest rate expectations was around 4.95%.
Fed Chair Jerome Powell said that after starting 2024 with three months of faster-than-expected price increases, it “will take longer than previously expected” for policymakers to become comfortable that inflation will resume the decline towards 2%.
Investors continue to price in the possibility of around 35 basis points (bps) of rate cuts in 2024, unchanged from before the Fed decision, but sharply lower as compared to over 150 bps at the start of 2024, according to CME’s FedWatch Tool.
The policy directive is moving exactly the way we expected in early 2024, said Madhavi Arora, an economist at Emkay Global, who does not expect the Fed to cut rates in 2024.
The sentiment was seen supported as oil prices tumbled, with the Brent crude futures dropping below $85 per barrel on a surprise pick up in US crude stocks and the prospect of a Middle East ceasefire agreement that could smoothen supply.
Oil prices have a direct impact on India’s retail inflation as the country is one of the largest importers.
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