MUMBAI: Indian government bond yields are expected to rise on Thursday, as the nation’s retail inflation print rose to its highest level in five months, which is expected to influence central bank’s interest rate trajectory.
The benchmark Indian 10-year government bond yield is seen in a 7.42%-7.47% band, a trader with a private bank said. The yield ended at 7.4348% on Wednesday.
“Though inflation was expected to rise as compared to previous month, a higher number raises concerns on how soon it could fall below the upper tolerance range of the Reserve Bank of India (RBI),” the trader said.
India’s annual retail inflation accelerated to a five-month high of 7.41% in September, as food prices surged, beating Reuters forecast of 7.3%.
The inflation print remained above the RBI’s target for three quarters, implying the central bank will have to report to the government why it failed to meet the target and what actions it will need to take.
The RBI’s Monetary Policy Committee (MPC), established in 2016, is mandated to keep inflation within 2 percentage points on either side of its 4% target.
The MPC has raised rates by 190 basis points since May, and economists expect it to raise rates by another 60 bps over the next two policies.
Barclays now expects the central bank to hike repo rate by 35 bps in December, against previous prediction of rates remaining unchanged.
Indian bond yields rise as 10-year US yield nears 4%
Still, recent cooling in oil prices is expected to cap any major spike in yields for the day. India is one of the largest importers of crude oil and that has a direct impact on its inflation.
The benchmark Brent crude contract has fallen nearly 6% in last three sessions. Market participants now await retail inflation data in the US, which could provide more clarity on the Federal Reserve’s interest rate trajectory.
The US Fed has already raised interest rate by 300 basis points since March and is expected to opt for another 75 basis points hike in November.
Key indicators:
** Brent crude futures 0.3% higher at $92.70 per barrel, after easing 5.7% in last three sessions
** 10-year US Treasury yield was at 3.9207% and the two-year note at 4.3142%
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