By Swati Bhat
MUMBAI (Reuters) - Indian bond yields eased while the rupee strengthened on Tuesday, as better-than-expected retail inflation print helped calm investors who were worried over the Reserve Bank of India advancing its policy normalisation timeline.
India's retail inflation rose less than expected in June at 6.26%, strengthening the view that the central bank could keep policy rates at current levels to support an economy hit hard by two strong waves of COVID-19.
Inflation stayed above the RBI's mandated 2%-6% target band for a second straight month, but eased on a month-on-month basis.
The benchmark 10-year bond yield closed down 2 basis points at 6.20% while the soon-to-be benchmark 6.10% 2031 paper fell 1 bp to 6.10%.
"After the shocker the previous month, the lower-than-consensus inflation in June 2021, particularly the drop in core inflation, would provide a breather to the RBI," said Sujan Hajra, chief economist at Anand Rathi Securities.
"Revival of sustained growth remains the key policy objective. The pause in the policy rate is likely to continue in 2021," he added.
The recent slowdown in India's monsoon rains could play a spoiler and push up inflation yet again. The weather bureau, however, expects monsoons to revive and continues to predict normal rains for the year.
Traders said they will be watchful of the emerging risks but since this would be the last inflation print ahead of the RBI's August policy review, there should be some comfort for bond traders over the next month.
The partially convertible rupee ended at 74.4925/5025 per dollar compared to its close of 74.57 on Monday.
Gains in the domestic share market and other Asian peers kept sentiment for the rupee buoyed. [.BO]
Traders also expect dollar inflows towards online food delivery company Zomato's $1.3 billion initial public offering which opens on Wednesday.
Most Asian currencies were stronger against the dollar with investors awaiting the U.S. inflation data for clues on the timing of the tapering and rate increases.
(Reporting by Swati Bhat; Editing by Shailesh Kuber)