Bond Yields Rise For Third Straight Day As Inflation Fears Loom

The government bond yields ended higher for a third consecutive session on Monday, as inflation worries flagged by the Reserve Bank of India weakened appetite.

The benchmark 10-year government bond yield ended at 7.2702%. The yield rose 8 basis points in last two sessions and ended at 7.2639% on Friday. The new 10-year 7.26% 2032 bond yield was at 7.2585%.

A report disclosing minutes of the Reserve Bank of India's monetary policy committee meeting said despite signs of inflation having peaked in India, the outlook remains highly uncertain.

The report further stated that bringing retail price inflation closer to the target of 4% was essential to help sustain economic growth over the medium term.

"The minutes only confirm our view of more front-loading of policy normalisation (rate hike) in September and one more rate hike in December," said Prasanna A., chief economist at ICICI Securities Primary Dealership.

A shift to neutral stance is unlikely before monetary policy in February, Prasanna said.

The consumer inflation dipped to 6.71% in July, easing for the third month in a row, but remained above the RBI's mandated target band of 2-6% for a seventh straight month.

The RBI had raised policy repo rate by 50 basis points in August and took its aggregate hike to 140 bps since May.

Market participants expect the repo rate to be hiked to at least 6% by December.

Inflation may ease below 6% by the fourth quarter of this financial year, bringing an end to the current cycle of rate hikes, analysts said over the weekend.

Towards close, bond yields were off intraday highs with investors closely tracking the 10-year U.S. Treasury yield which had touched 3% mark for the first time in a month on Monday.