India bond yields edge up as higher US yields outweigh local inflation cheer

MUMBAI: Indian government bond yields ended marginally higher on Monday as a rise in U.S. yields outweighed the positive impact of lower-than-expected retail inflation data for April.

The 10-year benchmark 7.26% 2033 bond yield ended at 7.0062%, compared with its close of 6.9938% on Friday.

“At a 7% yield, the 10-year benchmark bond is not only pricing in a policy pause but also some probability of a policy pivot (rate cuts) in the second half of the current financial year,” said Churchil Bhatt, executive vice president and debt fund manager at Kotak Mahindra Life Insurance Company.

India bond yields little changed ahead of debt sale

However, there is “still some time” before the Reserve Bank of India (RBI) can take comfort from a sustained fall in retail inflation to around 4%, until which the 10-year yield should stay around 7%, Bhatt said.

India’s consumer price inflation (CPI) eased to an 18-month low of 4.7% in April, from 5.66% in the previous month. The print was lower than Reuters’ forecast of 4.80% and stayed below the RBI’s upper tolerance limit for the second consecutive month.

The central bank targets inflation at 4%, with a tolerance level stretching to two percentage points on either side.

The fall in inflation in April reassured the RBI that its monetary policy is on the right track, Shaktikanta Das, the central bank governor, said on Friday.

Headline retail inflation in May is likely to fall further towards 4%, a level last seen in January 2021, according to some economists, who expect lower food prices to aid the decline.

The RBI held rates at its last meeting in April and is widely expected to do so again when it meets next month.

Despite the inflation cheer, a sharp fall in local bond yields was capped due to an uptick in U.S. Treasury yields, traders said.

The 10-year U.S. yield extended its gains from Friday and was last up almost three bps at 3.4887%, following data that slightly pushed up the possibility of a rate hike by the Federal Reserve in June.