MUMBAI: Indian government bond yields were in a thin range in the early session on Thursday, ahead of the Reserve Bank of India’s monetary policy decision, with a focus on commentary and other potential liquidity-draining steps.
The benchmark 7.26% 2033 bond yield was at 7.1773% as of 9:45 a.m. IST, after ending the previous session at 7.1745%.
“The upside may be around 7.25%-7.26% levels if the commentary is ultra hawkish along with some move to suck out the surplus,” a trader with a private bank said.
The central bank is expected to hold policy rates steady but could turn more hawkish as inflation in July is likely to have risen above its comfort band. Inflation in Asia’s third-largest economy snapped a four-month downward trend in June, climbing to 4.81%.
Retail inflation likely accelerated to 6.40% in July on surging food prices, breaching the upper end of the RBI’s 2%-6% tolerance band, as per a Reuters poll.
The RBI may look to tighten domestic rupee liquidity to quell inflationary pressures but will refrain from permanent cash withdrawal, traders and analysts said.
Reducing surplus liquidity, which could fuel inflation, could be one way of signalling a tougher stance.
If the central bank actually takes steps to curtail liquidity, the benchmark bond yield could break the current trading zone and may even touch 7.35%-7.40% levels if US yields rise further, said Ashutosh Tikekar, head of global markets - India at BNP Paribas.
After the RBI policy, the focus would shift to US inflation data, due post-Indian market hours, and fresh supply on Friday.
New Delhi aims to raise 330 billion rupees ($3.98 billion) through a sale of bonds, which includes 140 billion rupees of a new 10-year paper.
The new paper is unlikely to see a massive premium over the existing benchmark bond, traders said.
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