MUMBAI: India's benchmark government bond yields and swap rates rose on Wednesday after the central bank chief Duvvuri Subbarao was reported by media as saying inflation was "still quite high", denting hopes of a 50 basis points rate cut this month.
Data on Monday showed inflation in December had fallen to a three-year low, sparking hopes the Reserve Bank of India could cut interest rates by as much as 50 bps at its policy review on Jan. 29.
However, analysts said a 25 bps cut appeared more likely after Subbarao's comments, which would also curb some of the strong gains seen in bond prices since last December.
"It is a decline from the peak, but it is still quite high," Subbarao was quoted by Dow Jones Newswires as saying about the December data in an address to management students in the northern Indian city of Lucknow on Tuesday.
The benchmark 10-year bond yield was up 3 basis points to 7.86 percent at 0451 GMT after earlier gaining as much as 4 bps.
Swap rates also rose with the 1-year rate up 5 bps at 7.54 percent. The long-end benchmark 5-year rate was up 3 basis points at 7.13 percent.
Analysts said Subbarao's comments now made the outcome of the RBI's policy review more uncertain, with some analysts even saying the central bank could opt to not cut interest rates at all.
"This gives the market, which is at highs, a reason to rebalance and take excesses out. There is now some confusion about whether it will be only a 25 bps cut or any at all," said Mahendra Jajoo, head of fixed income at Pramerica Mutual Fund in Mumbai.
Yields had dropped to 29-month lows in January on expectations for interest rate cuts and hopes the government would contain its fiscal deficit by limiting bond sales and by considering raising diesel prices, among other measures.
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