Bloomberg News

India’s Bond Yields Rise to Three-Year High on Inflation, Rates

October 20, 2011

Oct. 20 (Bloomberg) -- India’s 10-year bonds fell for a second day as a government official said inflation remains at "higher than acceptable" levels, fueling speculation the central bank will raise borrowing costs at a meeting next week.

Yields rose to a three-year high after Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said authorities should use interest rates and fiscal measures to curb prices. The Reserve Bank of India will boost its repurchase rate for a seventh time this year on Oct. 25, according to 13 of 19 economists surveyed by Bloomberg.

“Recent statements from policy makers have made the possibility of rate hike a certainty,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “Inflation continues to be at elevated levels.”

The yield on the 7.8 percent notes due April 2021 rose one basis point, or 0.01 percentage point, to 8.79 percent in Mumbai, according to the central bank’s trading system. That is the highest closing level for benchmark 10-year rates since August 2008, according to data compiled by Bloomberg.

Rates on the securities jumped 35 basis points this month, heading for the biggest increase for 10-year notes since May 2009, after the government said it will borrow 32 percent more than previously estimated in the six months through March.

While six of the economists surveyed predicted no change in the central bank’s benchmark rate, the rest forecast a 25 basis points increase to 8.50 percent.

Inflation

Gains in the benchmark wholesale-price index has held above 9 percent for 10 months. The gauge rose 9.72 percent from a year earlier in September, according to government data.

An index measuring wholesale prices of agricultural products gained 10.6 percent in the week ended Oct. 8, the commerce ministry said in a statement today. That’s the biggest increase since the week ended April 16.

“The fact that inflation is triggered by food inflation or supply side constraints doesn’t mean that the monetary policy doesn’t have a role to play,” Rangarajan said reporters in New Delhi today.

The government revised its borrowing target for the second half of this fiscal year to 2.2 trillion rupees ($44 billion) on Sept. 29 from 1.67 trillion rupees earlier.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose one basis point to 8.24 percent, according to data compiled by Bloomberg.

--With assistance from Manish Modi in New Delhi. Editor: Anil Varma

To contact the reporter on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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