Bloomberg News

India Bonds Complete First Weekly Drop in 2 Months on Inflation

June 22, 2012

Indian bonds completed their first weekly drop in two months on concern the local currency’s slump to a record low will stoke inflation.

The nation’s inflation exceeds acceptable levels and restraining it may require sacrificing economic growth, central bank Governor Duvvuri Subbarao said on June 19, after the monetary authority unexpectedly kept interest rates unchanged at a policy review the day before. The finance ministry sold 150 billion rupees of debt today, part of its record 5.69 trillion rupees ($99.5 billion) borrowing program for the fiscal year ending March 2013.

“Bonds are being pressured by the rupee’s weakness as cost of imports may rise,” said J. Moses Harding, executive vice- president at IndusInd Bank Ltd. (IIB) in Mumbai. “Continued debt supplies resulting from high fiscal deficit is also a concern.”

The yield on the government’s 8.15 percent bonds due June 2022 rose four basis points, or 0.04 percentage point, this week to 8.09 percent in Mumbai, according to the central bank’s trading system. The rate rose three basis points today.

The wholesale-price index climbed 7.55 percent in May from a year earlier, which is above our tolerance level of 7.5 percent, according to Subbarao.

Fitch Ratings this week joined Standard & Poor’s in signaling that the rating of Asia’s third-largest economy is at risk of being lowered to junk status. India’s credit outlook was lowered to negative from stable by Fitch, which cited the heightened risk of a deterioration in growth potential and limited progress on paring the nation’s budget deficit.

The government is aiming to narrow the shortfall in its finances to 5.1 percent of GDP from 5.76 percent in the year ended March.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose 19 basis points this week to 7.77 percent, data compiled by Bloomberg show. It fell three basis points today.

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

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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