India bond yields little changed as traders await key inflation prints

Indian government bond yields ended largely unchanged on Wednesday as traders refrained from placing big bets ahead of crucial domestic and U.S. inflation data, which will give more clarity on the interest rate path in both countries.

The 10-year benchmark bond yield ended at 7.1808% after closing at 7.1884% in the previous session. Underlying sentiment remained positive after a proposal to include bonds on the Bloomberg Emerging Market Local Currency index from September. Market participants expect inflows of around $3 billion.

“The optimism over the likely inclusion in Bloomberg index was short-lived because in the near term, U.S. yields and interest rate decision will have bigger impact on local yields,” said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

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More than domestic inflation, Indian yields are expected to react to U.S. inflation data as it will provide clues on how soon the Federal Reserve will start cutting rates, Dash said.

December U.S. retail inflation data is due after Indian market hours on Thursday. The consumer inflation reading is seen rising by 0.2% on-month, while the reading for 12 months to December is expected to increase to 3.2%, according to a Reuters poll.

U.S. yields remained elevated on Tuesday, with the 10-year yield staying around the critical 4% mark, as the odds of aggressive rate cuts by the Fed in 2024 have reduced since the start of the New Year.

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The probability of a rate action in March has eased to 66% from around 90% towards December-end, according to the CME FedWatch tool. Back home, the December consumer price print is expected after market hours on Friday.

Retail inflation likely edged up in December on elevated food prices but stayed within the Reserve Bank of India’s target range for a fourth consecutive month, according to a Reuters poll. Inflation rose to 5.87% in December from 5.55% in November, the poll said.

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