MUMBAI (Dow Jones)--Indian government bond prices rose Wednesday after a weak industrial output reading allayed concerns of aggressive monetary tightening by the central bank. The benchmark 7.80% 2020 bond ended at INR97.57, compared with INR97.38 at Tuesday's close. The most-traded 8.08% 2022 bond rose to INR99.25 from INR99.17. Government data showed November factory output grew only 2.7%, compared with an 11.3% rise a year earlier and sharply lower than the consensus estimate of 6.0% in an economists' poll conducted by Dow Jones Newswires. The data diminished expectations of a 50 basis-point increase in interest rates by the Reserve Bank of India that some were anticipating, although a 25 basis-point hike looks almost certain to control flaring inflation, say economists. "A rate hike is almost certain and considering the sharp rise in food prices we think a 50 basis-point hike is quite possible," said Sujoy Das, head of fixed income at Religare Asset Management Company. "The bond yields can shoot up if such dynamics continue for some time. The yield on the 10-year bond can touch 8.50%." The RBI didn't raise rates at its last policy meeting in December, but analysts widely expect it will resume the tightening cycle that began in March 2010, and lift its borrowing and lending rates by 25 basis points each on or before its next policy review on Jan. 25. Food prices surged to an alarming level of 18.32% from a year earlier in the week ended Dec. 25, from 14.44% in the prior week, mounting pressure on the central bank to raise policy rates. Economists said the drop in industrial output growth could be temporary due to the recent volatility in some industry segments, such as capital goods and consumer durables, and that it won't stop the RBI from tightening monetary policy more. "The RBI shouldn't change its monetary tightening stance because inflation remains sticky," said Indranil Pan, chief economist at Kotak Mahindra Bank. "The factory output data was expected to be lower, but this drop shouldn't be translated into any major surprise to economic growth." In the currency market, the Indian rupee rose slightly against the U.S. dollar, tracking stronger local stocks and the euro's strength against the greenback. However, bids by oil companies at lower levels limited the rupee's appreciation. The dollar was at INR45.14 in late trade, compared with INR45.17 late Tuesday. "Traders remained very cautious as the stock market was very volatile, though it ended sharply higher," said a trader at a private bank. The Bombay Stock Exchange's Sensitive Index rose 337.76 points, or 1.8%, to close at 19,534.10, as short-covering and value buying across sectors helped it recover from a low of 19,048.56 around midday when weak industrial output data pushed it into the red. -By Sourav Mishra, Dow Jones Newswires; +91-22-61456112; sourav.mishra@dowjones.com

Source