MUMBAI: Indian government bond yields are expected to dip marginally in the early session on Wednesday, tracking a slide in US yields a day ahead of the Reserve Bank of India’s monetary policy decision.

The benchmark 7.26% 2033 bond yield is likely to be in the 7.15%-7.19% range after ending the previous session at 7.1643%, a trader with a state-run bank said.

“There was some bullishness yesterday, and we could see some follow-up buying as US yields eased from elevated levels,” the trader said.

Longer-dated US yields fell on Tuesday after Moody’s Investors Service cut its credit ratings on several small- to mid-sized US banks, warning that the banking sector’s credit strength will likely be tested by funding risks and weaker profitability.

The rating action, alongside weak Chinese data, reignited worries about the US economy, leading to some buying in Treasuries and pushing the 10-year yield back to around 4% levels.

Still, the focus remains on the outcome of the RBI policy meeting, where the central bank is unlikely to take any rate action, but could adopt a far more hawkish tone as the recent rise in food prices risks becoming entrenched, economists and market participants said.

India’s new 10-year bond plan pulls yields lower; RBI decision key

BofA Global Research expects a hawkish pause on Thursday, but expects another 25 basis points hike in 2023, as the 4% inflation target is still elusive and inflation battle is only half won. Inflation in Asia’s third-largest economy snapped a four-month downward trend in June, climbing to 4.81%.

Retail inflation likely accelerated to 6.40% in July on surging food prices, breaching the upper end of the RBI’s 2%-6% tolerance band for the first time in five months, a Reuters poll showed.

Meanwhile, New Delhi aims to raise 330 billion rupees ($3.98 billion) through a sale of bonds on Friday, which includes 140 billion rupees of a new 10-year paper, that will replace the existing benchmark soon.