By Dharamraj Lalit Dhutia
MUMBAI, Sept 21 (Reuters) - Indian government bond yields were largely unchanged in early trading on Wednesday, as markets await another round of aggressive monetary policy tightening and commentary from the U.S. Federal Reserve.
The benchmark Indian 10-year government bond yield IN072632G=CC ended at 7.2601%, after closing at 7.2645% on Tuesday. It had risen in the last five sessions, adding 18 basis points.
"Bond yields have risen in last few days in anticipation of heavy rate hike from the Fed, and if the comments are hawkish, we could see some more selloff this week," said Soumyajit Niyogi, director at India Ratings.
The benchmark 10-year U.S. Treasury yield US10YT=RR jumped to its highest level since 2011 on Tuesday at 3.60%, while the two-year yield US2YT=RR, which typically reflects interest rate expectations, was trading close to a 15-year high.
The Fed's policy decision will be announced later in the day, with markets pricing in an 18% probability of a 100-basis-points (bps) hike. The Fed has already hiked rates by 225 basis points since March, including 75 bps move in previous two policies.
The Fed's policy meet outcome will be followed by the Reserve Bank of India's decision due on Sept. 30, with many market participants expecting a 50 bps rate hike to control high inflation that has remained above the central bank's tolerance band for eight months.
The central bank raised interest rates by a total of 140 basis points between May and August, with economists now talking about the possibility of terminal repo rate in 6.25%-6.50% band.
India's banking system liquidity also slipped into deficit for the first time in nearly 40 months, which led to sharp spike in Treasury Bill yields. The 364-day T-Bill yield rose to 6.65%, highest since February 2019.
Still, Indian government is in no hurry to push inflation back to the central bank's medium-term target of 4%, for fear that aggressive rate hikes could hurt economic growth, two sources with direct knowledge of the matter told Reuters.
($1 = 79.9540 Indian rupees)
(Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)
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