Reserve Bank of India Governor Duvvuri Subbarao said late on Monday both wholesale price inflation and the consumer price index were at levels that would slow growth, continuing his hawkish comments since the central bank surprised markets by leaving rates on hold last month.
The comments came after debt markets had rallied on Monday after India reported lower-than-expected headline inflation, which some investors had seen as giving room for the RBI to cut rates.
However, not all analysts had been convinced of a rate cut, especially since the central bank is believed to want signs of fiscal consolidation steps from the government to avoid the economy from relying on monetary policy alone.
"Going by the comment, it seems July 31st might be a non- event as far as monetary action is concerned. Moreover the central bank intends to signal an immediate step in by the central government to address the supply side bottlenecks," said Shakti Satapathy, a fixed income analyst at A.K.Capital.
The most-traded 9.15 percent 2024 bond yield rose 3 basis points to 8.30 percent. The 10-year benchmark bond yield rose 3 basis points to 8.08 percent from its previous close.
Overnight indexed swaps also rose, with the 1-year rate up 6 basis points at 7.57 percent, while the 5-year was up 2 basis points at 6.89 percent.
Data on Monday showed India's wholesale price index rose a lower-than-expected 7.25 percent in June from a year earlier, however core inflation remained steady at around 4.85 percent.
Subbarao called that level above the RBI's comfort level.
"Certainly high inflation leads to loss of growth, and WPI at 7.25 percent as per the number that came this morning, and CPI inflation in double digits - we are way above that threshold," Subbarao said in a speech late on Monday.
The RBI's comfort level on inflation is believed to be at around 4.5 to 5 percent.
The central bank is also expected to be wary about inflation given the weaker-than-expected rainfalls so far in the monsoon season are raising worries about a hike in food prices.
Investors have also been hopeful for government measures after the presidential elections on Thursday, including a potential hike in diesel prices that would lower the government's subsidy burden.
Although such a fiscal consolidation step would be well received by markets worries about India's finances, hikes in fuel prices could also add to inflationary pressures.