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MUMBAI: Indian government bond yields are seen opening higher on Tuesday, as acceleration in inflation indicated the Reserve Bank of India may continue to tighten monetary policy aggressively.

The benchmark 10-year government bond yield is seen in a 7.21%-7.25% band, a trader with a private bank said.

The yield rose one basis point to end at 7.1811% on Monday. “There could be a slight gap-up opening for yields, but 7.25% should act as a solid upside, as the reading is still around the most bearish estimates and will not completely take the market off-guard,” the trader said.

India’s annual retail inflation rate accelerated to 7% in August, driven by a surge in food prices, which is expected to put more pressure on the central bank to hike interest rates again later this month.

The inflation snapped a three-month downward trend, and came in above both the 6.9% forecast in a Reuters poll of economists and July’s 6.71% reading. Capital Economics and Barclays expect the RBI to hike repo rate by 50 bps this month.

“We now expect the RBI to deliver another 50 bps rate hike in September, taking the repo rate to 5.90%, which should also be the time when real rates reach levels desired by the MPC,” said Rahul Bajoria, chief India economist at Barclays.

Bond yields slightly up ahead of inflation data

“If inflation remains sticky, we believe the RBI can continue hiking in December,” Bajoria said. India’s inflation has stayed above the RBI’s upper tolerance range for eight straight months.

The RBI targets inflation in the 2%-6% band.

The RBI has hiked key policy rate by 140 basis points in May-August.

Traders will also await US inflation data due later in the day, which could offer cues for the Federal Reserve policy decision due on Sep. 21.

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