Government bond yields may increase following US peers

Bond yields to rise: Government bond yields are expected to experience a slight increase in the early session on Thursday, influenced by a surge in US counterparts and remarks from Reserve Bank of India (RBI) Governor Shaktikanta Das stressing the prerequisite for a sustained decline in inflation before contemplating any rate adjustments.

The benchmark 10-year yield in India is projected to fluctuate within the 7.15 per cent-7.20 per cent range, following its previous close at 7.1642 per cent, as indicated by a trader from a primary dealership.

"After weak core inflation data prompted bullish bets to exit, yesterday's commentary from the RBI governor and the uptick in Treasury yields could contribute to additional selling pressure today," the trader noted.

US yields witnessed an ascent on Wednesday, reversing the preceding bullish sentiment, prompted by an unexpected upswing in UK inflation for December and robust US retail sales data. These developments bolstered the argument that interest rate cuts may not be as aggressive as previously estimated. 

The 10-year yield reached a five-week high of 4.13 per cent, with the two-year yield, a closely watched indicator of interest rate expectations, leading the upward trajectory in the yield curve.

Traders have subsequently reduced the likelihood of a first Fed rate cut by March to 53.8 per cent, down from 63.1 per cent on Tuesday, according to the CME's FedWatch Tool.

Earlier in the week, local bond yields eased following a decline in India's core inflation for December, fostering expectations of easing inflationary pressures. 

Some economists even speculated that the central bank might shift its policy stance to 'neutral' in February. 

However, Governor Das stressed the need for the monetary policy in India to remain actively disinflationary despite the recent significant drop in core inflation.

Das expressed in an interview with Reuters at the World Economic Forum (WEF) in Davos that although he anticipates moderation in January inflation, a durable basis of 4 per cent inflation is essential before contemplating any shifts in policy focus.

(With Reuters Inputs)