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MUMBAI: Indian government bond yields were trading marginally higher on Thursday, as traders cut positions to make way for fresh debt supply due on Friday, while index inclusion bets continued to support sentiment.

India’s federal government is scheduled to auction bonds worth 330 billion Indian rupees ($4.15 billion) on Friday, including 130 billion rupees of 7.26% 2032 note that will replace the existing 10-year benchmark soon.

The benchmark 10-year government bond yield was at 7.1651% as of 0445 GMT. The yield rose five basis points on Wednesday to end at 7.1550%.

“With no new positive trigger, there is continuation of yesterday’s selloff and also as traders want to make space in their portfolios to absorb new supply,” a trader with a primary dealership said.

Bond yields rose on Wednesday as an unexpected rise in US inflation in August sent Treasury yields surging, raising the odds of a more than 75 basis-point rate hike by the Federal Reserve on Sept. 21.

The two-year US yield stayed close to the 15-year high level, and sharply above the 10-year level.

The two-year yield typically reflects interest rate expectations.

An aggressive rate hike from the Fed may exert pressure on the Reserve Bank of India (RBI) to follow suit with a third consecutive 50-basis-point rate hike on Sept. 30, some analysts have said.

Nomura raised its forecast for the terminal repo rate in India, citing elevated inflation and more front-loaded rate hikes by the Fed and the European Central Bank.

Bond yields rise as inflation stokes rout in US Treasuries

The research house now sees the repo rate at 6.15% by December, up from the 6.00% forecast previously, including a 50 bps hike at the end of this month.

India’s central bank has been focussing on controlling inflation that rose to 7% in August, staying above its tolerance range for an eighth straight month.

The RBI targets inflation in the 2%-6% band and has hiked repo rate by 140 basis points during May-August.

Earlier this week, Ashima Goyal, a monetary policy committee member, said the pace of interest rate increases should be calibrated to ensure economic recovery in India does not stall.

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