The Indian bond yields fell sharply during early trade on Tuesday on hope that the Indian notes will get included in the global bond index.
However, further gains has been capped by higher inflation data, uptick in US Treasury yields, and Brent crude oil prices.
At 12.40 p.m., the yield on old benchmark bond 6.54 per cent-2032 was trading at 7.1290 per cent, as compared to 7.1811 per cent closed on Monday, and new benchmark bond 7.26 per cent-2032 bond was trading at 7.0902 per cent, as against 7.1354 per cent closed on the previous trading session.
"Major factor for fall in yields is expectations that our bonds will get included in global bond index and there is also some buying from foreign investors," said a dealer with large state-owned bank.
On Monday, according to the data released by Ministry of Statistics & Programme Implementation showed that Consumer Price Index (CPI), spiked to 7.00 per cent in August, up from 6.71 per cent in July, due to uptick in food prices.
As the CPI hit the 7 per cent mark, it remained above the central bank's upper tolerance band of 6 per cent for the straight eighth month.
The government has mandated the central bank to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for a five-year period ending March 2026.
To tame inflation within the central bank's band, the Reserve Bank of India (RBI) has so far in this fiscal year raised repo rate by 140 basis points, but still it did not helped to keep inflation in their control and remained above upper tolerance band.
Morgan Stanley said they expect a 35 basis points rate hike in the September policy review. "We expect CPI inflation to remain around 5.3 per cent in F2024 and thus believe that normalization in real rates is warranted."
The yield on US Treasury notes remained mostly higher on Monday as the US dollar weakened and inflation expectations declined.
The yield on the benchmark 10-year Treasury note gained 3 basis points, trading at 3.353 per cent.
Meanwhile, Brent crude oil prices were trading at $94.37 per barrel.