MUMBAI, Sept 14 (Reuters) - Indian government bond yields ended higher on Wednesday as an unexpected jump in U.S. inflation raised bets of aggressive rate hikes by the Federal Reserve, stirring fears of similar increases in the domestic market.
The benchmark Indian 10-year government bond yield ended at 7.1550%. The yield fell seven basis points on Tuesday to end at 7.1077%, its lowest since Apr. 27.
The 10-year 7.26% 2032 bond yield ended at 7.1254%, after closing at 7.0789% on Tuesday.
"We continue to retain a view of 6% policy rate by December, with prospect of more hikes next year," said Prasanna A, chief economist at ICICI Securities Primary Dealership.
"A 4% Fed funds rate and 6% repo rate would be incompatible in our view. Further, a 6% repo rate would be inadequate to guide inflation and inflation expectations back to a 4% target."
The U.S. consumer price index rose 0.1% last month, data on Tuesday showed, converse to expectations of a 0.1% dip. Consumer prices edged up 8.3% in the 12 months through August, higher than the market estimate of 8.1%.
The two-year U.S. yield spiked to 15-year high of 3.80% earlier on Wednesday, while the 10-year yield was at 3.44%.
Futures on Fed funds priced in a roughly 34% chance of the Fed raising rates by 100 bps on Sept. 21. The Fed has hiked rates by 225 bps between March and July to battle inflation that is running at four times its medium-term target.
Some analysts expect the Reserve Bank of India to follow up with a third consecutive 50-basis-point rate hike later this month after a bigger-than-expected rise in retail inflation to 7% in August.
India's inflation has stayed above the RBI's tolerance range of 2%-6% for eight straight months, forcing it to hike the repo rate by 140 basis points between May and August.
Treasury bill yields also jumped to their highest level in over three years earlier in the day, as the market braces for more rate hikes in coming months. (Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)
