MUMBAI: Indian government bond yields are expected to fall marginally in the early session on Tuesday, after local retail inflation cooled to an over two-year low, moving closer to the Reserve Bank of India’s (RBI) target.

The benchmark 7.26% 2033 bond yield is expected to be in the 6.99%-7.04% range, after closing at 7.0184% in the previous session, a trader with a primary dealership said.

There was some reaction towards the end of the session yesterday, so we may not see any major move, but the initial trading should see yields heading lower, the trader said.

Yields eased towards the end of session on Monday, with benchmark bond ending two basis points lower, as a majority of the market had expected inflation to fall.

Retail inflation eased to 4.25% in May from 4.7% in April, moving closer to the RBI’s target of 4% and staying within its 2%-6% range for the third straight month.

India bond yields seen little changed ahead of inflation data

However, economists expect inflation to pick up in near term. Last week, the RBI highlighted that it aims to reach 4% inflation, and will do “whatever is necessary to ensure that long-term inflation expectations remain firmly anchored.”

This had led to selloff in fixed income assets. Kotak Mahindra Bank cut its fiscal year inflation estimate to 4.9%, saying that the May print will provide further relief for the RBI and will be taken as a signal that the rate hike cycle is taking effect.

Traders now await US retail inflation data due later in the day, which would provide key guidance for the Federal Reserve’s interest rate decision, due on Wednesday.

The odds of a pause by the US central bank currently stand at over 78%.

Traders also await a fresh supply from state debt sale later in the day, which is larger than expected for the third consecutive week.