Government bonds dropped to their lowest in two months on Friday after data released late on Thursday showed retail price inflation in February rose more than market expectations, sparking some profit-taking after strong gains this year.

The consumer price index edged up 5.37 per cent in February, more than the 5.2 per cent rise expected by analysts, underscoring the risk of a rebound in inflationary pressures from rising commodity prices.

Still, analysts said they did not expect the CPI to alter rate-cut expectations, given that it was within the central bank’s inflation target of 6 percent by March 2016.

The Reserve Bank of India has cut interest rates twice this year and is expected to lower rates again at its policy review in June.

“The CPI on a month-on-month basis is higher but is still with the central bank’s comfort zone, so don’t think it will have any impact on rate cut expectations immediately as such,’’ said Harish Agarwal, a fixed income trader with First Rand Bank.

The benchmark 10-year bond yield by 0851 GMT was up 6 basis points (bps) at 7.78 per cent, its highest level since January 14.

Bonds have surged this year on expectation of rate cuts by the central bank, sending the 10-year yield to a 2015 low of 7.65 per cent on February 2.

Traders, however, said they expected the 10-year yield to hold in a range of 7.65 to 7.85 per cent until the borrowing calendar is announced towards the end of this month.

In the overnight indexed swap market, the benchmark five-year swap rate and the one-year swap rate both rose 2 bps each to 7.09 per cent and 7.64 per cent, respectively.

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