Indian bond yields little changed as retail inflation dents mood

MUMBAI: Indian government bond yields were trading largely unchanged in the early session on Tuesday as local retail inflation stayed above the central bank’s target, cementing bets of another hike in policy rates next month.

Profit booking and higher state debt supply also offset the impact of a further fall in US yields.

The 10-year benchmark 7.26% 2032 bond yield was at 7.3512% as of 10:00 a.m. IST, after closing lower at 7.3579% on Monday.

The yield posted its biggest single-session drop since Oct. 4. “Focus is back on local inflation and another prospective rate hike,” a trader with a private bank said.

India’s retail inflation eased to 6.44% in February but remained above the central bank’s target, underscoring bets the Reserve Bank of India will hike the rate in April. Core inflation also stayed above 6%, according to economists.

“Above-6% headline inflation and sticky core CPI (consumer price index) would likely prompt majority of the MPC (Monetary Policy Committee) members to opt for a 25 bps rate hike in April,” Citi Research said.

The RBI has raised repo rate by 250 basis points in this financial year to 6.50%.

Indian states aim to raise 322.33 billion rupees ($3.91 billion) via a sale of bonds, nearly 60 billion rupees more than the planned outlay.

Meanwhile, US yields dropped further on Monday as the collapse of Silicon Valley Bank prompted investors to drastically pare down expectations of a big Federal Reserve rate hike next week and seek the safety of government debt.

The two-year yield, a closer indicator of interest rate expectations, crashed 56 basis points (bps), its biggest single-session fall since October 1987.

Indian bond yields drop after US peers crash

The two-year yield plummeted more than 100 bps in three sessions until Monday at 4.10%. The 10-year US yield fell 18 bps on Monday and was down 46 bps in the previous three sessions to trade at 3.57%.

Traders are now awaiting US inflation data due later in the day.

The Fed funds futures are now pricing in an over 70% chance for a 25-bps hike in March, and 30% for status quo.

The odds for a 50-bps hike had risen to 68% last week.