Moderating CPI figures likely to calm bond market

With the crude prices and Consumer price index (CPI)-based inflation moderating, market experts expect stability to return to the bond market. The CPI marginally slowed to 5.1 per cent in January on lower food inflation from 5.2 per cent in December, mildly pulling back the northward trajectory seen since July 2017.

Ashutosh Khajuria, executive director at Federal Bank told Financial Chronicle, “While the CPI numbers will provide some relief to the bond market, the Index of Industrial Production (IIP) numbers would boost the equity market. This is the third consecutive month with capital goods showing an increase while the CPI number is lower than market expectations.”

Khajuria further noted that the RBI’s neutral stance had been vindicated and he expected the yield on the new 10-year benchmark to fall by 30 basis points to 7.25 per cent by April as the CPI is consistently coming at a stable rate and below expectations. The adverse base effect which will be continuing till June may push CPI closer to 6 per cent but this has been discounted by the market and had been “mentioned in no uncertain terms” in the recent RBI policy review, he said.

Steady decline

The Indian 10 year G-sec yield had been steadily declining from 2014 and was somewhat flat during the first half of 2017. But since the second half of 2017, yields have moved up by 114 basis points, in a period of about seven months. During the same period the bond yield has also increased in five developed/ developing countries (China, Germany, UK, US and Euro Area) and it is within the range of 22-42 basis points. One basis point is one hundredth of a percentage point.

Ajay Manglunia, executive vice-president and head fixed income advisory at Edelweiss Financial Services explained, “There is an inverse co-relation between bonds and equities. Bonds do well in a deflationary or a recessionary environment as seen in 2008 with yields being historically low. In the last couple of years, both equity and bonds were doing well as the government was keeping the fiscal deficit in check.”

As the budget showed that there would be a fiscal slippage, bond yields hardened while the equity markets have been rising as growth prospects are improving. The yield tried to settle down after the government assured that it will stick to the fiscal deficit number, Manglunia said.


The CPI inflation for January 2018 has come in at 5.07 per cent compared to 17-month high of 5.21 per cent in December 17 and 3.17 per cent in January 2016, with easing of both rural and urban inflation. Compared to December 2017, except ‘Housing’ and ‘Clothing and Footwear’, all other categories have witnessed a moderation in prices. On a positive note the Index of Industrial Production (IIP) grew by 7.1 per cent in December 2017 compared to 8.4 per cent in November17.

Sparked by a global sell-off, foreign investors were net sellers of more than Rs 3,800 crore in the last seven trading sessions. They added Rs 4,600 crore in the debt markets during the same period.

According to an economist, post the Union budget and RBI policy this month, the 10-year bond yields have pulled back on relief that the central bank did not adopt an outright hawkish tone and maintained its data-dependent guidance. Much of the negativity regarding the fiscal outlook and inflation concerns are in the price and thereby consolidative moves are likely in the near term.