MUMBAI: Indian bonds fell on Tuesday as caution prevailed a day before retail inflation data, while traders at state-run banks also squared off positions ahead of a nationwide strike impacting the sector.
Consumer inflation is expected to slow to a record low in October to 5.80 percent, dragged by sharp drops in food and oil prices, a Reuters poll showed. Easing inflation would intensify calls for the Reserve Bank of India (RBI) to cut interest rates at its Dec. 2 policy review.
Dealers are also bracing for low volumes across all markets in India on Wednesday as unions at most banks have called for a nationwide strike that is expected to leave trading rooms with minimal staffing but not shut down activity altogether.
"If the inflation comes at around 5.70-5.80 levels, then it will be a non-event because this is already priced in," said Ganti Murthy, head of fixed income at IDBI Asset Management in Mumbai.
"If it turns out to be below or above this level, then the markets will react swiftly."
The benchmark 10-year bond yield closed up 1 basis point at 8.19 percent on Tuesday. It has dropped 9 basis points so far in November.
Still, despite the rising expectations of rate cuts, senior RBI officials have warned that they would like to see more signs that prices are easing.
RBI Executive Director Deepak Mohanty was quoted by local media calling inflation expectations as high at a Mumbai event on Tuesday, after last week Deputy Governor H.R. Khan said inflation still had a "long way" to go before it eases.
India's five-year swap rate closed 3 bps higher at 7.41 percent, while the one-year rate rose 4 basis points to 8.01 percent.
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