By Anushka Trivedi and Dharamraj Dhutia
MUMBAI (Reuters) – Indian government bond yields are expected to trend higher this week, as sentiment stays bearish, but debt as well as the local currency will track U.S. and India inflation data.
India’s headline retail inflation print is due on Monday, followed by U.S. retail inflation on Tuesday.
Higher food prices likely nudged up India’s annual retail inflation last month from a 12-month low in December, but it stayed within the Reserve Bank of India’s targeted range for a third consecutive month, a Reuters poll of economists predicted.
Inflation ran above the upper tolerance limit of 6% for the first 10 months of 2022 but fell below it in the last two, largely because of a fall in food inflation.
Not only that, inflation fell in both November and December. But that trend likely reversed last month.
The inflation rate is forecast to have risen to 5.9% in January from 5.72% in December.
India’s benchmark bond yield ended at 7.3627% on Friday, having posted a weekly rise of 8 basis points – its biggest jump since the week ended Sept. 23. The yield fell 11 bps the week before.
Bond yields jumped after the RBI highlighted core inflation concerns, keeping the door open for another hike. The RBI raised rates by 25 bps last week, its sixth consecutive hike.
Market participants expect the benchmark bond yield to be in the 7.32%-7.42% band this week.
“Bond yields are likely to trade in steady range ahead of inflation (data), but yield may rise towards 7.40% levels in the near term,” said VRC Reddy, treasury head of Karur Vysya Bank.
Meanwhile, the Indian rupee finished last week down 0.8% at 82.4975 per dollar, its biggest weekly drop in two months, after robust jobs data bolstered expectations that the Federal Reserve will keep hiking interest rates.
The rupee will take its cues from the U.S. inflation print and its impact on the dollar index, a trader with a private bank said.
In case peak rate expectations change the rupee could depreciate towards 83 or even beyond, the trader added.
For the week, the currency could move between 82.10 and 82.80 unless the U.S. inflation data is a big surprise, dealers said.
“Foreign investor outflows were among the reasons for the rupee’s underperformance recently, but we have seen a lot of it already, so the worst could be behind us,” said Jayaram Krishnamurthy, co-founder and COO at Almus Risk Consulting.
KEY EVENTS:Â Â Â Â
•   India Jan CPI Inflation – Feb 13, Monday (5:30 pm IST)
•   Indian Jan WPI Inflation – Feb 14, Tuesday (12:00 pm IST)
•   U.S. Jan Core CPI – Feb 14, Tuesday (7:00 pm IST)
•   U.S. Jan Retail Sales – Feb 15, Wednesday (7:00 pm IST)
•   U.S. Industrial Production – Feb 15, Wednesday (7:45 pm IST)
•   U.S. Jan Housing Starts – Feb 16, Thursday (7:00 pm IST)
(Reporting by Anushka Trivedi and Dharamraj Dhutia; Editing by Eileen Soreng)
