The government bond market is poised for a slight dip in yields on Monday, driven by anticipated easing in core inflation for December. Despite a rise in headline retail inflation, the 10-year benchmark bond yield is expected to hover between 7.14% and 7.19%, maintaining a positive sentiment.
Analyzing Market Sentiment: Core Inflation Eases Amidst Stable Headline Figures Market analysts anticipate a bullish start to the week as core inflation shows consistent signs of easing, even as headline inflation numbers remained within expected bounds. The annual retail inflation for December surged to 5.69%, marking its fastest pace in four months, primarily influenced by increased prices of certain food items. However, the market focuses on core inflation, which excludes volatile food and energy prices, projecting a dip to 3.8%-3.89% in December from 4.05%-4.2% in November.
A trader from a primary dealership highlights the market’s positive response to the easing core inflation figures. The trader notes, “While the headline inflation numbers did not bring any major surprises, the consistent easing in core inflation figures is viewed positively by the market. We might witness some bullish activity today.”
January Projections and RBI’s Stance: Softening Inflation and Restrictive Monetary Policy Projections for January indicate a sub-5% retail inflation, with diminishing adverse base effects and moderating food inflation, according to IDFC First Bank. The bank further predicts a continued softening of core inflation to 3.6% in January. Against this backdrop, the Reserve Bank of India’s (RBI) monetary policy committee has kept the benchmark repo rate steady at 6.50% for five consecutive meetings. The RBI report suggests that monetary policy might continue to remain in “restrictive territory” due to persistent inflation levels exceeding the central bank’s target.
Global Factors and Yield Trends: A Look at the US Market Last week witnessed a decline in US yields, triggered by unexpected drops in December producer prices data, fueling speculation of a potential early interest rate cut by the Federal Reserve. The 10-year US Treasury yield eased to 3.95% on Friday, marking a 9 bps decline for the week. The global economic landscape and trends in major economies are expected to influence the trajectory of bond yields in the coming days.
