Investors in India see another year of high rates on price shock

“The central bank has little room to signal dovishness due to food prices, a robust economy, and higher global rates,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “The spread between Indian and US rates has already reached very low levels.”

India’s bond yields have been on an uptick since sliding below 7 percent in May, rising to their highest level in more than three months.

Commentary from economists and fund mangers ahead of RBI’s Aug. 10 decision suggests there’s even a small chance of a rate hike in the coming months as inflation is likely to overshoot the central bank’s 2 percent-6 percent target band.

But some say the fallout from any surge in price pressures may be temporary.

Yields on the 10-year bond have been locked in a tight range in the past few months, and a substantial move beyond the 7 percent-7.25 percent band is not likely in the near term, said Amit Tripathi, chief investment officer of fixed income investments at Nippon India Mutual Fund. “Any negative surprise in the form of higher inflation prints may not sustain for long.”

The RBI left the benchmark rate unchanged in the last two meetings but its tone was largely perceived as hawkish due to inflation risks. Those concerns may accentuate after the recent surge in food costs. Crude prices are also climbing, making imports costlier for the world’s third-largest consumer of oil.

Data due Aug. 14 will probably show inflation rose to 6.47 percent in July, according to a Bloomberg survey of economists.

“Any significant deviations in inflation expectations or growth projections are likely to impact the central bank outlook and in turn yield expectations,” said Anand Nevatia, fund manager at Trust Mutual Fund. “Escalation in geopolitical tensions can lead to spike in crude and food prices thus having a negative impact on yields.”