INDIA BONDS-India 10-year bond yield ends at 3-week high, hawkish Fed drags sentiment

By Dharamraj Dhutia

MUMBAI, Dec 19 (Reuters) - Indian government bond yields jumped on Thursday, with the benchmark yield ending at a three-week high, after the U.S. Federal Reserve flagged a slower pace of policy easing in 2025, citing sticky inflation and a stable labour market.

The 10-year bond yield ended at 6.7856%, the highest level since Nov. 28, compared with the previous close of 6.7465%.

The Indian rupee also fell to a fresh record low and ended at 85.07 versus the U.S. dollar. Constant decline in the local currency has also weighed on investor sentiment.

The 10-year U.S. Treasury yield crossed the 4.50% mark, hitting its highest level since May end after the policy decision and commentary from the central bank.

Chair Jerome Powell said more reductions in borrowing costs hinge on further progress in lowering stubbornly high inflation.

The Fed cut rates by 25 basis points as widely expected, but the policymakers now expect only 50 basis points of cuts in 2025 and in 2026, according to the updated dot plot, down from the 100 bps forecast in September.

The odds of a pause in January have jumped to 94%, according to the CME FedWatch Tool.

The Fed's hawkish projections for future interest rates are likely to add to troubles for other central banks, including the Reserve Bank of India, that were set to cut rates in 2025.

The policy trade-offs are getting acute due to the entrenched state of India's stagflation, tricky timings and a small window of conventional rate cuts as global dynamics turn more fluid, mounting FX pressure and increasing cost of FX intervention, said Madhavi Arora, chief economist at Emkay Global Financial Services.

"Feb rate-cut call gets trickier from here on."

Meanwhile, likely value purchases from state-run banks ensured the India benchmark bond yield did not break above par levels, traders said.

Locally, the debt supply and minutes of the RBI's December meeting, both due on Friday, are now on investors' radar. (Reporting by Dharamraj Dhutia; Editing by Eileen Soreng)