India bond yields to ease as cooling US inflation lifts mood

India bond yields to ease as cooling US inflation lifts mood

Indian government bond yields are likely to ease early on Thursday, tracking a drop in U.S. peers after inflation in the world’s largest economy grew at a slower-than-expected pace calming bets of aggressive rate hikes. However, an upward move in local retail inflation may not allow any large bullish moves.

The benchmark 7.26% 2033 bond yield is expected to be in the 7.06%-7.10% range after ending the previous session at 7.1160%, a trader with a primary dealership said. “Most of the moves regarding easing inflation in the U.S. was already done on Monday and Tuesday, and with the jump in Indian inflation, any major rally may fizzle out soon at around key levels,” the trader said.

Inflation registered its smallest annual increase in more than two years, having risen 0.2% last month for an annual gain of 3.0%. In the 12 months through June, the core CPI rose 4.8%. The 10-year yield eased 12 basis points, while the two year-yield, a closer indicator of interest rate expectations, declined 15 bps on Wednesday, with the inversion in the key part of the yield curve contracting to around 85 bps from over 100 bps last week.

Back home, surging food prices accelerated India’s June retail inflation rate to 4.81%, snapping four months of easing and higher than both the revised 4.31% for May and 4.58% expected in a Reuters poll. “The recent spike in food prices may caution the RBI, but we expect it to stay on hold for an extended period, without dropping its guard on inflation,” Barclays said.