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MUMBAI: Indian government bond yields rose on Wednesday following an overnight selloff in US Treasuries, stirred by fears that the Federal Reserve will deliver more super-sized rate hikes.

The benchmark 10-year government bond yield was at 7.1504% by 0504 GMT, up from 7.1077% in the previous session.

There is a “a bit of correction” on the back of US bond reaction to the inflation data, but index inclusion bets will keep the yield differentials between US and India low, said a trader at a private sector bank.

The difference between the 10-year US and India is hovering near its lowest level since 2009.

Large Fed rate hikes alongside expectations of Indian bonds being included into global indexes have led to the yield difference falling to around 370 basis points.

Treasury yields rose overnight after data showed that headline US consumer prices unexpectedly rose in August on a month-on-month basis. More importantly, the core inflation rate rose 0.6%, twice of what economists polled by Reuters had predicted.

Bond yields seen up as inflation climbs faster-than-expected

Futures are now pricing in a near 40% chance that the Fed will raise rates by 100 bps next week.

Prior to the data, the debate among market participants was whether the Fed will deliver a 50 bps or 75 bps hike.

Meanwhile, the Reserve Bank of India is tipped to raise rates by 35 bps to 50 bps on Sep 30. A few traders highlighted the RBI’s size of rate hike may be influenced by the Fed’s actions.

India’s inflation has stayed above the RBI’s tolerance range for eight straight months.

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