Indian federal bond yields ended sharply higher on Friday as fears of a rate hike by the central bank heightened after inflation remained sticky in December and buying interest from foreign institutional investors faded. India's headline inflation accelerated in December on costlier food items and the Reserve Bank of India (RBI) is expected to raise key rates by at least 25 basis points on January 25.
Foreign institutional investor limits in government and corporate debt, which were increased by $5 billion each to $10 billion and $20 billion, were allotted in December. The limits will expire on January 15. China's central bank on Friday raised banks' reserves requirement by 50 basis points, its seventh increase since early 2010.
The wholesale price index, India's main inflation gauge, rose an annual 8.43 percent in December compared with an expected 8.35 percent rise in a Reuters poll and above 7.48 percent in November, government data showed. The second most-actively traded 8.08 percent, 2022 bond yield ended at 8.19 percent, up 5 basis points from previous close, and the less liquid benchmark 10-year bond yield ended at 8.19 percent versus Thursday's 8.14 percent.
In the overnight indexed swaps market, the benchmark five-year rate ended at 7.88 percent, down 1 basis point, while the one-year swap rate ended at 7.30 percent, up 3 basis points. The government on Friday sold debt worth $2.42 billion, but did not elicit much reaction in the bond market as cut-off yields were broadly in line with estimates. Next week, bond yields are likely to tread higher given the cautious sentiment on monetary tightening and fresh paper supply.
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