By Dharamraj Dhutia
MUMBAI, Feb 14 (Reuters) - Indian government bond yields are expected to jump in the early session on Tuesday after domestic retail inflation was sharply higher than expected, cementing bets on one more rate hike from the central bank.
The benchmark 10-year yield could move in the 7.38%-7.43% range, a trader with a private bank said, after closing at 7.3646% on Monday.
"There should be a gap up opening for yields as the market was clearly not prepared for what has transpired, and the yields are bound to react," the trader said. "Still, there could be some buying in the 7.40%-7.42% band, and traders will also await U.S. inflation data."
India's annual retail inflation in January rose above the central bank's upper threshold for the first time in three months, on higher food prices vindicating last week's hawkish monetary policy stance.
The inflation rate rose to 6.52% in January from 5.72% in December and was above the Reserve Bank of India's upper targeted limit of 6% for the first time since October and much higher than the 5.9% estimate, according to a Reuters poll of 44 analysts.
The RBI had raised the repo rate for the sixth consecutive time last week by 25 basis points to 6.50% and kept door open for more tightening after highlighting core inflation concerns.
The upside surprise in the January inflation print and expectation of a 6.4%-6.5% level for February has raised conviction of a 25 bps rate hike at the April meeting, Citi Research said in a note.
"Sticky core inflation and resilient growth momentum doesn't bode well for RBI's aim of breaking the persistence of core inflation."
DBS flagged that the latest inflation print poses at least 40-60 bps of upside risk to the RBI's revised inflation forecast of 5.7% for January-March.
Meanwhile, traders also await U.S. retail inflation data due later in the day, which could show a 0.5% and 0.4% month-over-month gain in headline prices and the core CPI, respectively for January. KEY INDICATORS: ** Brent crude futures down 0.9% at $85.80 per barrel, after rising 0.2% in previous session ** 10-year U.S. Treasury yield at 3.7054% and two-year note at 4.5154% ** Twelve Indian states to raise 122 billion rupees ($1.48 billion) through sale of bonds ($1 = 82.5940 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)