MUMBAI: Indian federal bond yields extended rise on Tuesday as traders began pricing in the possibility of a rate increase following last week's strong industrial output data and comments from the central bank chief, but inflation data was eyed for more cues .
India will release July's wholesale price index , which a Reuters poll showed probably rose an annual 9.2 percent -- slightly slower than June's 9.44 percent, around noon (0630 GMT) on Tuesday.
Also keeping up the upward pressure on bond yields was a 100-billion-rupee ($2.2 billion) bond auction on Thursday.
The 10-year benchmark bond yield rose to 8.34 percent, 4 basis points higher than Friday's close, after rising to 8.35 percent in early trade.
Indian markets were closed on Monday for a national holiday.
Volumes were a low 19.25 billion rupees ($426 million) on the central bank's trading platform.
"If inflation surprises on the upside, the 10-year yield could rise to 8.37-8.38 percent," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.
"The panic of last week in global markets has subsided and domestically, inflation today at noon remains the key," said a fixed-income trader at STCI Primary dealer.
"Anything higher than 9.50 will be bad... especially as today the market is cued in on domestic theme rather than global," the trader said.
India's industrial output expanded above forecasts in June helped by strong capital goods production, data showed on Friday, confirming resilience in Asia's third-largest economy and supporting the case for the central bank to persist with its battle against high inflation.
Traders had started pricing in the possibility of a rate increase at the Reserve Bank of India's (RBI's) Sept. 16 policy review after the strong factory data, but inflation remains key.
"All eyes are on today's inflation print for further direction on the RBI thought process and in the long term, 8.35 percent yields on the 10-year look good, given incremental credit-deposit ratios," said Ananth Narayan G., head of fixed income, currencies and commodities at Standard Chartered Bank.
The RBI Governor D. Subbarao said last Friday it was important to bring down inflation to sustain growth and that it was too early to signal a change in monetary stance, suggesting the central bank may not be done with monetary tightening.
The benchmark five-year overnight indexed swap rate was at 6.93 percent, up 10 basis points on the day.
The one-year rate was up 15 basis points at 7.83 percent. It was up 50 basis points from a five-month low touched last Thursday.
Copyright Reuters, 2011
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