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India bond yields rise on inflation concerns, MPC minutes watched

·2-min read
FILE PHOTO: A security guard at the Reserve Bank of India (RBI) headquarters in Mumbai, India

By Dharamraj Lalit Dhutia

MUMBAI (Reuters) - Indian government bond yields ended higher for second consecutive session on Friday as focus shifted back to inflation, while a new 10-year bond saw higher-than-expected cutoff yield indicating weak demand.

Market participants now await the minutes of Reserve Bank of India's latest policy meeting, due to be published later on Friday, and will provide more clarity on the central bank’s stance on interest rate trajectory.

The benchmark 10-year government bond yield ended at 7.2639%, up two basis points. The yield rose 6 bps on Thursday to end at 7.2421%. The yield was however lower for the fifth straight week.

"The monetary policy committee may persist with rate hikes until real rates are projected to be in positive territory in medium term, which may happen pretty soon," said Kunal Sodhani, vice president of the global trading center at Shinhan Bank.

The RBI sold 130 billion rupees ($1.63 billion) of a new 10-year bond at a cutoff yield of 7.26%, against expectations of 7.23%, as per a Reuters poll of traders. The note slipped into discount in its trading debut, but ended at 100.05 rupees, yielding 7.2529%.

On Thursday, RBI said inflation might still require a monetary policy response as it remained above the target range despite easing in recent months.

"Inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward," the central bank said in an article on the state of the economy, published in its monthly bulletin.

India's retail inflation dipped to 6.71% in July, easing for the third month in a row, and missing the 6.78% print forecast by economists in a Reuters poll. The RBI, however, expects inflation to average 6.7% in this fiscal.

Earlier this month, the RBI's monetary policy committee had raised the bank's key lending rate by 50 bps to 5.40%, its third increase in four months to curb rising price pressure. The RBI has hiked repo rate by 140 basis points since May.

($1 = 79.7925 Indian rupees)

(Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)