Yields on Indian government bonds are set to rise as September's retail inflation hit a nine-month high, mainly due to surging food prices.

India's retail inflation rose to 5.49% last month, surpassing economists' forecast of 5.04%, mainly driven by increasing food costs. As a result, the yields on India's benchmark 10-year government bond are expected to fluctuate between 6.77% and 6.81%. The Reserve Bank of India (RBI) has adopted a neutral policy stance, aiming for average inflation of 4.5% in the next fiscal year, targeting 4%. This situation complicates the RBI's monetary strategy, since notable decreases in food prices by November are essential for a potential rate cut in December. If food costs only slightly drop, any rate reduction might be postponed until at least February.

The rise in Indian bond yields could be softened by favorable factors like declining oil prices -- with Brent crude down 3% to $75.10 per barrel -- and a favorable bond demand-supply situation, as the RBI reduces secondary market sales and initiates a second debt buyback soon. Additionally, global investor sentiment is uplifted by FTSE Russell's plans to add Indian debt to its index, boosting market confidence.

The bigger picture: Balancing economic objectives.

The relationship between inflation rates and bond yields requires careful management. Eight Indian states are set to raise $1.55 billion through bond sales, aligning with the global bond market, where US Treasury yields offer competitive benchmarks -- 10-year at 4.0904% and two-year at 3.9575%. This context highlights the importance of aligning national economic goals amidst global economic shifts and inflationary challenges.