MUMBAI, Aug 10 (Reuters) - Indian government bond yields eased on Wednesday, after rising for the last two sessions, as traders looked to cover short positions heading into key U.S. inflation data.
The 10-year benchmark bond yield ended at 7.3101%, after closing at 7.3485% on Monday. The yield had jumped 19 basis points in the last two sessions. Indian markets were shut on Tuesday.
"Bond yields had risen sharply in the last two days, and today there was some short covering from traders, as inflation is expected to come down," said Yogesh Kalinge, vice president at AK Capital Services.
Economists expect year-on-year headline inflation to touch 8.7%, a small retreat from June's 9.1%, with a 0.5% month-on-month rise in core inflation.
Indian bond traders also await local retail inflation data for July, which is due on Friday. A Reuters poll of economists expects July inflation to temper down to 6.78% from 7.01% in June and the near eight-year high of 7.79% in April.
"Since inflation is expected to ease in coming months, we expect bond yields to consolidate around current levels," AK Capital's Kalinge added.
The Reserve Bank of India hiked key policy rate by 50 basis points on Aug. 5 in its third consecutive rate hike, after inflation stayed above the upper tolerance level of the central bank for six straight months.
The RBI repo rate now stands at 5.40%, and analysts expect the central bank to raise rate by another 60 basis points by end of December.
Market participants also expect the 10-year bond yield to revisit its recent high of over 7.60% in the medium term on more rate hikes as well as continuous borrowing from the government.
Meanwhile, IDFC Mutual Fund kept its stance of liking four- to five-year government bonds, as it expects effective overnight rate to peak below 6.00% in the current interest rate cycle. (Reporting by Dharamraj Lalit Dhutia Editing by)
