Bond yields rise as traders sell ahead of RBI rate decision

MUMBAI, Dec 6 (Reuters) – Indian government bond yields tracked US yields to end higher on Tuesday, further propped by traders cutting positions ahead of the Reserve Bank of India’s monetary policy decision due on Wednesday morning.

The benchmark 10-year bond yield ended at 7.2486% after ending at 7.2254% on Monday.

Treasury yields rose on Tuesday after strong data from the services and manufacturing sectors and a solid non-farm payrolls report reinforced expectations of the US Federal Reserve continuing to raise interest rates in 2023.

The 10-year yield rose to 3.60%, while inversion between the two-year yield and the 10-year yield widened, a scenario which generally precedes recession.

“There was some position cutting … traders are now waiting for the RBI’s policy guidance and rate action,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.

The monetary policy committee is expected to hike rates by a smaller 35 bps to 6.25%, according to economists polled by Reuters.

A strong two-thirds majority, however, said it was still too soon for it to take its eye off inflation. The MPC has hiked the repo rate by 190 bps since May.

Retail inflation eased to a three-month low of 6.77% in October, helped by a slower rise in food prices and a higher base effect.

India’s benchmark bond yield is expected to rise on the back of higher government borrowings, Rohit Arora, senior emerging markets forex and rates strategist at UBS Global Research said.

“For the fiscal year end, we are forecasting the 10-year India bond yield at around 7.50%. Over the course of next few months, we expect the debt markets’ demand-supply misbalances to resurface,” he said.

Arora said he did not see value in entering the Indian bond market at current levels as a combination of “somewhat elevated supply burden,” and tapering demand from banks fuel a rise in yields.

(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)