Faster India Inflation Seen as Bond Rally Stalls Before Monsoon

  • Consumer prices probably rose 5.05 percent in April: survey
  • No major risk apart from monsoon uncertainty: India Ratings

A three-month rally in Indian bonds has stalled as investors await data that may show inflation accelerated in April.

Consumer prices probably rose 5.05 percent last month from a year earlier, according to the median estimate in a Bloomberg survey, before an official report later on Thursday. That compares with a 4.83 percent increase in March, which was the smallest in six months. Central bank Governor Raghuram Rajan wants to limit price gains to 5 percent by March 2017.

The yield on sovereign notes due January 2026 fell to 7.42 percent in Mumbai, after closing at 7.43 percent on each of the previous three days, prices from the Reserve Bank of India’s trading system show. The yield has fallen two basis points so far in May, after declining 20 basis points in the last three months. The 10-day historical volatility on benchmark 10-year securities has plunged to 1.1 percent, the lowest in at least a decade, from this year’s high of 14.9 percent in March, data compiled by Bloomberg show.

“Market sentiment remains very balanced and a notable move in yields will happen only if inflation data is above or below expectations,” said Bansi Madhavani, an analyst at India Ratings & Research Pvt. in Mumbai. “There are no major risks apart from the uncertainty about monsoon.”

Investors are drawing comfort from this year’s forecast for above-normal rainfall during the June-September monsoon, after back-to-back droughts battered Indian farmers. The seasonal showers, which account for more than 80 percent of the nation’s annual rains, could boost farm output, thereby keeping food costs in check and brightening the outlook for growth and inflation in Asia’s third-largest economy.

Rajan, who lowered the benchmark repurchase rate last month for the fifth time since the start of 2015, has said the central bank would watch the performance of the monsoon to look for more room to ease. Subdued inflation and an accommodative monetary policy are among reasons that could help drive the 10-year yield to 7.20 percent by end-2016, Nagaraj Kulkarni, Singapore-based senior Asia rates strategist at Standard Chartered Plc, said in an interview on Wednesday.

The rupee fell 0.1 percent on Thursday to 66.6250 a dollar, according to prices from local banks compiled by Bloomberg. It has weakened 0.7 percent so far this year in Asia’s worst performance.

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