Bond yields dip for third straight day on easing inflation

Indian government bond yields fell for the third consecutive session on Wednesday, as easing inflation in the United States and India bolstered expectations of a likely slowdown in interest rate hikes.

The benchmark 10-year yield ended at 7.2218%, after closing at 7.2658% on Tuesday. The yield has eased by eight basis points in the last three days.

"Inflation has been a major worry for markets across the world and, with softer readings, there is a likelihood that it may have peaked and that led to some bond purchases," said Abhishek Upadhyay, senior economist at Primary Dealership.

In the 12 months through November, U.S. consumer prices climbed 7.1%, its smallest advance since December 2021. This was preceded by a 7.7% rise in October, with a peak of 9.1% in June, which was the sharpest increase since November 1981.

India's retail inflation has also moderated to an increase of 5.88% in November from a 6.77% jump in October, and came in well below economists' median estimate of 6.40%.

Inflation readings for both nations are now at the lowest for 2022 and could spur their central banks to slow down the size and pace of rate hikes.

Market participants are now waiting for the Federal Reserve's policy decision later in the day, with broad expectations that the rate hike will be scaled down to 50 basis points (bps) after four back-to-back increases of 75 bps. Since March, the Fed has raised rates by 375 bps.

Even though the broader market expects the Reserve Bank of India to hike rates one last time in February, some analysts are now pencilling in a lower probability for this event.

The RBI has raised the repo rate by 225 bps since May to control inflation, which stayed above its target band for 10 months through October.

Nomura lowered the probability of a February rate hike to 60% from 70%. Deutsche Bank, however, expects the RBI to stop rate hikes in February and raised the prospects of the central bank cutting rates from December 2023.