Easing retail inflation helps Indian bonds to trade below 6.30%

Bond yield and bond prices are inversely proportional, when yield rises, bond prices fall, and vice versa.

Easing retail inflation, which has stayed below the Reserve Bank of India’s medium-term target of 4 percent, has given the much needed boost to the bond market that has seen yield trading below 6.3 percent since May 14.

Trading in the range of 6.28-6.29 percent, this is the lowest yield seen since November 9, 2021.

Usually, when inflation eases sharply it signals a chance of rate cut by the central bank and boosts the sentiments of bond traders in the bond market. In anticipation of a rate cut, investors start buying in the market at current prices to take advantage of the higher prices when the yields starts falling on the bonds.

Bond yield and bond prices are inversely proportional, when yield rises, bond prices fall, and vice versa.

India's retail inflation slowed to 3.16 percent in April from 3.34 percent in March. It is the lowest year-on-year inflation since July 2019, the government said in a statement.

Further, there is growing consensus among market participants that the RBI will cut more rates in the coming policies, to support growth amid a tariff war. A cooling inflation levels provide elbow room for lower rates.

On April 9, the central bank reduced the key repo rate by 25 bps — the second consecutive cut since February this year, which has taken rate cuts to 50 bps, on a benign inflation outlook and moderate growth. It also shifted its stance from ‘neutral’ to ‘accommodative’.

Market participants expect another 50 bps repo rate cut by end of FY26.

A further reduction in the repo rate may help Indian corporates and government (state and central) to issue bonds at lower rates.