* RBI Gov says inflation remains “way above” comfort level
* Investors pare back bets on rate cut at July 31 policy review
* Weak monsoon could exacerbate inflationary pressures (Updates with closing levels, quote, details)
By Subhadip Sircar
MUMBAI, July 17 (Reuters) - 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 month.
The RBI has also pushed for fiscal consolidation steps from the government to prevent the economy from relying on monetary policy alone.
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 subsidy burden.
Although such a fiscal consolidation step would help reduce worries about India’s finances, it could also add to inflationary pressures. (Editing by Rafael Nam)