(Reuters) - Indian government bond yields ended marginally higher on Tuesday, a day after domestic retail inflation overshot the central bank's tolerance band in January, cementing bets of one more rate hike by the central bank.
The benchmark 10-year yield ended at 7.3692&, after closing at 7.3646% on Monday. The yields rose as high as 7.4060% earlier in the day.
"Inflation has surprised most market participants, and sentiment has turned further bearish, which is clearly visible in the movement of bond yields as well as swaps," said Abhishek Upadhyay, senior economist at ICICI Securities primary dealership.
Rising food prices pushed India's annual retail inflation in January to 6.52%, above the Reserve Bank of India's (RBI) upper threshold for the first time since October.
Analysts had expected headline inflation of 5.9%, as per a Reuters poll.
The RBI, last week, raised the repo rate for the sixth consecutive time by 25 basis points (bps) to 6.50% and kept the door open for more tightening after saying that core inflation stayed "sticky".
The one-year overnight indexed swap rate, often seen as the clearest indication of future policy rates, rose to the highest level in three months, signalling that another interest rate hike is likely in April, analysts said.
The one-year swap rate jumped to 6.93%, its highest since Nov. 10, jumping 27 bps before last week's central bank monetary policy announcement.
Deutsche Bank expects the RBI to hike the repo rate to 6.75% in April, while Citi said the spike in inflation has increased its conviction for another 25 bps move in April.
Traders now await U.S. retail inflation data due later in the day, which could show a 0.5% and 0.4% month-over-month gain in headline prices and core CPI, respectively, for January.
The 10-year U.S. yield was trading around 3.70%.