MUMBAI: Indian government bonds rose on Monday, despite higher-than-expected wholesale price inflation, as bargain-hunting spurred a recovery after steep losses in the previous session ahead of the central bank's policy review this week.
Data on Monday showed India's wholesale price inflation hit a 14-month high in November, cementing expectations the Reserve Bank of India will raise interest rates for a third consecutive time at its policy review on Wednesday after a separate report last week showed consumer prices also accelerated.
Still, traders said they were taking some comfort on signs that vegetable prices are coming down this month, raising the prospect the RBI could stay on hold after raising the repo rate by 25 basis points to 8 percent this week.
"Inflation is being driven mainly by vegetable prices and investors are looking through these numbers at a more medium term, and expect these prices to unwind. So, one more rate hike and then a pause is where the market is operating from," said Sandeep Bagla, senior vice president at ICICI Securities PD.
"Core inflation has not gone up much, and after seeing today's market we shouldn't expect to see a very adverse kind of movement to a 25 bps rate hike, but the statement will also be critical for cues."
The benchmark 10-year bond yield ended down 4 basis points at 8.87 percent.
Traders are also looking ahead at the Federal Reserve's two-day meeting ending on Wednesday amid fears the central bank will soon move to withdraw its monetary stimulus.
Worries about such "tapering" sparked a foreign investor sell-off in Indian markets a few months ago, sending the rupee to a record low and bond yields sharply higher.
In the overnight indexed swap market, the benchmark five-year swap rate closed down 3 bps at 8.48 percent, while the one-year rate ended 1 bp lower at 8.53 percent.
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