MUMBAI: Indian government bond yields rose in early trades on Thursday, tracking their US peers, after the Federal Reserve stuck to its hawkish tone on monetary policy, leading to speculations of a higher peak rate.

The benchmark 10-year yield was at 7.4499% as of 0500 GMT, after ending at 7.4044% on Wednesday.

“Sentiment has turned bearish again, as the market was not expecting such hawkish commentary from the Fed and yields will adjust accordingly,” a trader with a primary dealership said.

“Also, there is some caution ahead of tomorrow’s debt supply, which will lead to more selling pressure.” New Delhi aims to raise 300 billion Indian rupees ($3.62 billion) through bond sales, including of liquid five- and 14-year bonds, on Friday.

The Fed raised interest rates by 75 basis points, as was widely expected, on Wednesday and said its battle against inflation will require borrowing costs to rise further. However, Chair Jerome Powell said there was more ground for the Fed to cover for the target federal funds rate to reach a “sufficiently restrictive” level that will slow inflation.

The 10-year US yield rose above 4.10%, but the two-year US yield, which is a more direct indicator of rate expectations, rose closer to its highest level in over 15 years.

Indian bond yields seen little changed ahead of Fed policy decision

Traders will also focus on the outcome of the Reserve Bank of India’s special meeting later in the day, called to discuss the central bank’s response to the government after failing to meet its inflation target for three straight quarters.

However, the RBI will not immediately release details of its written response as it does not have the authority to do so, Governor Shaktikanta Das said on Wednesday.

Nomura said the assertions by RBI governor implicitly signal that it is too premature to halt the rate hiking cycle.

“Our baseline case is for a 35bp hike in December and 25bp in February, with a terminal repo rate of 6.50%.”