India yield spread to widen on limited scope of aggressive easing, better liquidity conditions India Jan CPI inflation was at a 5-month low of 4.31% compared to 5.22% previous – this was aided by softer inflation in food items such as vegetables (in line with seasonal trends), pulses, fruits, and eggs. The headline reading was below market expectations of 4.55-4.60%, though yields were broadly flat. This was on account of core CPI inflation (excluding volatile items) edging higher. The inflation after stripping out food, fuel and tobacco was at 3.74% vs 3.64% previous. While this has been below 4% for the last few months, though a sharp rise in precious metals add to upside risks to core inflation in the near term. The RBI MPC unanimously cut rates by 25 bps in the Feb policy meeting, but refrained from shifting the policy stance to accomodative. This put bond market participants in a dilemma, who were anticipating guidance on room for further easing, driving yields to rise (with a rate cut that wasn’t ?). While the Jan inflation was much softer than expected, with the near term trajectory also appearing benign as of now, though we still believe that the quantum for further easing rates looks limited – with risks seen from worsening geopolitical tensions, continued depreciation in INR as well as lesser than expected easing in the US.
