Indian government bond yields are expected to rise in early session on Thursday, tracking a further jump in U.S. yields, while worries over elevated domestic inflation continue to bother investors. The benchmark 7.26% 2033 bond yield is likely to be in the 7.15%-7.19% range after ending the previous session at 7.1516%, a trader with a state-run bank said.
Traders also said that a drastic fall in the rupee could weigh on bond market sentiment. “Factors have turned more bearish, and we could see more upside to bond yields today, and till tomorrow a test of 7.20% is very likely. Even the rupee’s depreciation will start to hurt now,” the trader said.
The Indian rupee is expected to decline more on Thursday on back of a selloff on U.S. equities following the downgrade of the U.S. credit rating, and non-deliverable forwards indicate the rupee will open at around 82.70 to the dollar after closing at 82.5825 in the previous session. U.S. yields rose on Wednesday after strong private employment data and an announcement about the refunding of the government’s maturing debt. The 10-year treasury yield rose above 4.10% for the first time in nine months.
Local bond yields have been rising recently, tracking a spike in U.S. yields, on the belief that rates will remain elevated for longer. The odds of a rate hike in September are just around 18%. Meanwhile worries that retail inflation will jump again in the near term is keeping investors at bay, as it could force the Reserve Bank of India (RBI) to pose a hawkish stance next week.
“We mark to market inflation to 6.2% in QE Sep-23 (vs our previous 5.5%), with July CPI expected to track around 6.2-6.4%,” Morgan Stanley said. India’s retail inflation jumped to 4.81% in June, after easing for four months. Traders will also await debt supply on Friday, as New Delhi aims to raise at least 390 billion rupees.