MUMBAI: Indian government bond yields were trading marginally lower on Wednesday, with the benchmark bond yield dropping further below the crucial 7% mark, as underlying sentiment stayed positive.

The 10-year benchmark 7.26% 2033 bond yield was at 6.9470% as of 10:00 a.m. IST, after ending at 6.9640% in the previous session.

“The broader sentiment continues to support a further rally. But traders will continue to remain cautious and further moves may be slow,” a trader with a state-run bank said.

Bond yields have eased after data last week showed that India’s headline retail inflation eased to an 18-month low of 4.7% in April, staying below the central bank’s upper tolerance limit of 6% for the second consecutive month.

Some economists expect inflation in May to fall further towards 4%, a level last seen in January 2021.

The Reserve Bank of India (RBI) targets inflation at 4%, the midpoint of its tolerance band. The RBI maintained the status quo on interest rates in April, surprising the market that was expecting a 25-basis-points hike.

The benchmark bond yield has eased 16 basis points so far in May, as traders anticipate the Federal Reserve may cut rates next quarter, which may force the RBI to follow suit.

The RBI’s next policy decision is due on June 8, with the Fed’s decision following on June 14.

India bond yields seen little changed as benchmark stays around 7%

Traders expect the benchmark bond yield to test the next key level, of 6.90%, over the next few sessions if demand at the bond auction remains strong this week.

New Delhi is aiming to raise 330 billion rupees ($4.04 billion) through the sale of bonds, including 140 billion rupees of the benchmark paper, on Friday.

The RBI will also auction Treasury bills worth 320 billion rupees later in the day.