Optimistic outlook on bonds, spurred by new RBI head, faces inflation test
2024-12-12
Category: economic

    The constructive outlook on Indian bonds spurred by the appointment of a new  Reserve Bank of India (RBI) chief will have to contend with local inflation data due later on Thursday and higher U.S Treasury yields.
The benchmark 10-year yield (IN067934G=CC) is likely to move between 6.70% and 6.73%, a trader with a private bank said, compared with its previous close of 6.7171%.
Data due later in the day, during market hours, is expected to show that domestic retail inflation likely fell to 5.53% in November after breaching the central bank's 6% upper tolerance band, per a Reuters poll. 
The data comes on the heels of the appointment of Sanjay Malhotra as the RBI head, which has prompted expectations that the central bank will cut interest rates sooner than expected .
The market "base scenario has quickly moved" to a rate at the next meeting in February following the appointment of the RBI chief, a fixed income trader at a bank said.
"We have two inflation prints between now and the February meeting. To cement a rate cut in February, you will need that inflation moderates in-line with what markets are expecting at the very least."
A "strong reduction in food prices" over the next few months will be required for inflation to ease, IDFC FIRST Bank said in a note.
The underlying market sentiment has been broadly positive following Malhotra's appointment. B Prasanna, head of treasury at ICICI Bank said, he expects the 10-year to fall to 6.60% if the RBI cuts rates in February. Nomura retained its long 10-year bond recommendation. 
Meanwhile, U.S. Treasury yields rose on Wednesday amid data showing a widening in the U.S. budget deficit, overturning a drop post the U.S. consumer price inflation data. 
KEY INDICATORS:
** Brent crude futures BRN1! little changed at $73.54, having climbed more than 3% over the previous three sessions
** Ten-year U.S. Treasury yield US10Y rises to 4.28%