Benchmark yield at 1-mth high as RBI worry over inflation hurts sentiment

Indian government bond yields ended higher on Thursday, with benchmark bond yield at a one-month high, as traders assessed the impact of the Reserve Bank of India's (RBI) commentary on inflation.

The benchmark 10-year yield ended at 7.3164%, the highest since Nov. 21 and after ending at 7.2867% on Wednesday.

"The policymakers are concerned over inflation, which means more hikes are in the offing," said Debendra Kumar Dash, senior vice president, treasury, at AU Small Finance Bank.

"Still, a large part of the market also believes the central bank is at the fag end of the rate hike cycle. So the reaction to minutes was somewhat muted."

The RBI raised its key policy rate by 35 basis points (bps) to 6.25% in December, its fifth straight hike. India's headline retail inflation eased to 5.88% in November but core inflation has stayed above 6%.

"A premature pause in monetary policy action would be a costly policy error at this juncture," Governor Shaktikanta Das said in the minutes of the central bank meeting.

During the day, yields moved in a narrow range as most traders remained on the sidelines ahead of the quarter-end.

Most market participants expect benchmark yields to remain in a thin range till December-end, on low trading volumes and the absence of fresh cues.

"Till budget, I see yields moving in the 7.25%-7.35% band. While the market focus remains on inflation, growth concerns will also start impacting sentiment, which should limit any sharp upward movement in yields," Dash added.

Meanwhile, Arun Bansal, executive director and head of treasury at IDBI Bank, feels the policy repo rate is likely to rise to 6.75% in 2023.

"The RBI will have to be mindful of the rupee's depreciation and the narrowing interest rate differential with the U.S. There is still a 60% probability that the terminal repo rate is hiked to 6.75%."