10-year bond yield hits 4-month low as easing inflation boosts market confidence

Bond yields fall: The 10-year government bond yield in India witnessed a decline in early trade on Monday, dropping below the crucial 7.15 per cent threshold to reach a nearly 4-month low. Bullish sentiments were fueled by optimistic expectations of reduced inflationary pressures.

As of 10:00 am, the 10-year benchmark bond yield stood at 7.1350 per cent, down from its previous close of 7.1791 per cent. The yield had briefly touched 7.1321 per cent earlier in the session, marking its lowest level since September 25.

According to a trader with a state-run bank, the market is placing more emphasis on easing core prices, signaling potential lower inflation in the coming months, despite a slight uptick in India's annual retail inflation to 5.69 per cent in December from 5.55 per cent in November, driven by higher food prices.

Inflationary signals and bond market reaction

While headline inflation remains a consideration, the focus on declining core inflation (estimated at 3.8 per cent-3.89 per cent compared to 4.05 per cent-4.2 per cent in November) has influenced market dynamics.

Citigroup (Citi) suggests that with the easing of inflationary pressures, the likelihood of a change in the Reserve Bank of India's Monetary Policy Committee (MPC) stance in February is increasing. The MPC has maintained a status quo on rates and stance in the current financial year, aiming to align inflation with its medium-term target of 4 per cent.

Citi notes, "In our base case, we still expect a stance change to neutral in April, but February is now becoming a live policy for its consideration."

Last week, US yields declined following unexpected drops in December producer prices, raising speculations of an early interest rate cut by the Federal Reserve. The 10-year US yield eased by 9 basis points, closing at 3.95 per cent on Friday.

As global economic factors come into play, the odds of a rate cut by the Federal Reserve in March have increased to 73 per cent, up from 68 per cent the previous week, as indicated by the CME FedWatch tool.

(With Reuters inputs.)