* RBI Gov says inflation remains "way above" comfort level
* Investors pare back bets on rate cut at July 31 policy
* Weak monsoon could exacerbate inflationary pressures
(Updates with closing levels, quote, details)
By Subhadip Sircar
MUMBAI, July 17 Indian federal bond yields and
swap rates rose on Tuesday after the central bank chief said
inflation remains "way above" comfort levels, dashing hopes of a
rate cut at the July 31 policy review.
The comments from Reserve Bank of India Governor Duvvuri
Subbarao are a continuation of his hawkish rhetoric since the
central bank surprised markets by leaving rates on hold last
The RBI has also pushed for fiscal consolidation steps from
the government to prevent the economy from relying on monetary
The warning on inflation reversed part of the rally see in
debt markets on Monday after lower-than-expected headline
inflation data was seen as giving the RBI room to cut rates.
"Now rate action from RBI is more or less ruled out for the
next couple of months. There is no chance of headline inflation
moving below 7 percent," said J. Moses Harding, head of asset
liability management at IndusInd Bank.
The most-traded 9.15 percent 2024 bond yield
rose 3 basis points to 8.30 percent.
The 10-year benchmark bond yield rose 4 basis
points to 8.09 percent from its previous close.
Overnight indexed swaps also rose, with the 1-year rate
closing up 6 basis points at 7.57 percent,
while the 5-year ended up 3 basis points at
6.90 percent after hitting on Monday its lowest level this year.
Yields and swap rates had dropped on Monday after data
showed India's wholesale price index rose a
lower-than-expected 7.25 percent in June from a year earlier.
However, Subbarao called that level above the RBI's comfort
level, which he pinned on Monday at around 5 percent.
"Certainly high inflation leads to loss of growth, and WPI
at 7.25 percent as per the number that came this morning, and
CPI inflation in double digits - we are way above that
threshold," Subbarao said in his speech.
The central bank is also expected to be wary about inflation
given the weaker-than-expected rainfall so far in the monsoon
season are raising worries about higher food prices.
Investors have also been hopeful for government measures
after the presidential elections on Thursday, including a
potential hike in diesel prices to lower the government's
Although such a fiscal consolidation step would help reduce
worries about India's finances, it could also add to
(Editing by Rafael Nam)