Indian bond yields likely to rise on hawkish RBI comments, US yields

MUMBAI: Indian government bond yields are expected to open marginally higher on Wednesday, after hawkish commentary from the central bank over inflation outlook, while higher US yields would also likely weigh on sentiment.

The benchmark 10-year yield is likely to move in a 7.29%-7.34% band during the day, a trader with a private bank said. The yield ended at 7.2991% on Tuesday.

The Reserve Bank of India (RBI) seems to be worried that inflation would remain entrenched and hence the chances of any dovishness from the authorities may be postponed further, the traders said.

India’s headline inflation has broadened out and become “stubborn”, the RBI said in its monthly bulletin on Tuesday.

“Inflation may be slightly down, but it is certainly not out,” the central bank said in a report.

With headline inflation projected to rise in the second quarter of the next financial year starting April after declining in the first three months, there can be no letting down of the guard, the bank said.

Indian bond yields marginally higher tracking oil prices, US yields

India’s retail inflation eased to 5.88% in November, first reading of below 6% upper tolerance level of the RBI’s target in 2022.

However core inflation remains sticky leading to expectations of another rate hike in February.

The RBI is mandated to keep inflation at 4% over the medium term, within a comfort band of 2% on either side, and has raised repo rate by 225 basis points in 2022 in its fight against inflation.

US Treasury prices fell, with the 10-year yield rising above 3.70% after the Bank of Japan surprised markets by widening the band of its yield curve control, sparking a global sell-off in bonds.

Kotak Mahindra Bank expects the 10-year benchmark bond yield to trade in the range of 7.20%-7.40% in the near term.

“We expect the MPC’s decision to be finely split between a last 25 bps hike and a pause in the February policy. However, core inflation remaining elevated and sticky will remain a cause for concern.

We, thus, expect a final 25 bps repo rate in the upcoming policy with a prolonged pause,“ its chief economist Upasna Bhardwaj said.