The yield on 10-year Indian government bond on Tuesday rose by 10 basis points to 6.696 percent, a level last seen in December, as hopes of another rate cut by RBI diminished after inflation data showed a sharp surge.
Bond yield and prices move in the opposite direction.
On Monday, consumer price inflation index (CPI), that measures retail inflation, for the month of December shot up to 7.35 percent from 5.54 percent in November. This has been the highest inflation level seen in India since July 2014.
The surge was driven by an increase in food inflation, which makes for 50 percent of the weightage in CPI index, by 14.12 percent in December as against (-)2.65 percent in the same month of the previous year. Vegetable prices rose acutely by 60.5 percent on a year-on-year basis.
In December, when RBI kept its key interest rate unchanged after its monetary policy review, citing "much higher than expected" inflation for its decision.
Last week, Governor Shaktikanta Das said that price stability is the central bank's primary objective as continuing high inflation disproportionately affects the poor.
RBI's next monetary policy review is scheduled for 6 February, a few days after Finance Minister Nirmala Sitharaman presents the Union Budget in the parliament for the financial year 2020-21.
However, bets of rate cuts by the central bank are not off the table for market participants. Some see a possible rate cut in April as inflation starts to moderate as per RBI's projections.
All eyes are now on the Union Budget on announcements that could push economic growth in the country.