MumbaiYields on Indian government bonds are expected to remain in a narrow range this year as inclusion of domestic bonds in global indexes may not materialise in 2022, a rates strategist with HSBC said.

"We still see the inclusion as a low probability event for the current year. Our base case is that index inclusion is likely to be delayed to next year," Himanshu Malik, Asia-Pacific rates strategist, HSBC, told Reuters, adding that he expects yields to rise next year.

Yields have eased since August, with the benchmark 10-year yield dropping to 7.10 per cent from 7.62 per cent in June, amid growing chatter about the inclusion of some Indian bonds in J.P.Morgan's emerging markets bonds index.

However, yields climbed in the past few sessions in the absence of any update on inclusion as well as higher inflation in India and the United States.

Malik said he expects the 10-year bond yield to stay around 7.25 per cent by the end of 2022 and rise to 7.50 per cent by the end of 2023. The yield was at 7.27 per cent on Tuesday, having gained 16 basis points in last five sessions.

Curbing risks

Malik also flagged elevated fiscal deficit as a risk.

"Wider fiscal deficit and large government bond borrowings will still weigh on the markets, and it is very difficult to see any big fiscal consolidation before going into next general election in 2024," Malik said.

India aims to gross borrow 14.31 trillion rupees ($180 billion) through bonds in the current financial year, of which it is scheduled to raise 5.86 trillion rupees in October-March. The government is also aiming to maintain a fiscal deficit of 6.4 per cent for this financial year.

With inflation remaining above the RBI's target band of 2-6 per cent since January, there could be risks of a longer tightening cycle than what the market is expecting, Malik said.

"INR rates market is yet to price in the risk that there is a possibility that the tightening cycle could go for longer and more aggressively."

The RBI raised rates by 140 basis points in the May-August period, with many traders anticipating another 50 bps move in September as the U.S. Federal Reserve looks set to hike by at least 75 bps on Wednesday.