India’s Bonds Slump as Subbarao Says Inflation Is Still High

Indian bonds fell the most in more than two months after central bank governor Duvvuri Subbarao said retail inflation is still high and that the nation’s balance of payments is under stress.

The yield on the most-frequently traded notes due 2022 rose to a two-week high as Subbarao said in a speech in the western city of Ahmedabad that managing the nation’s current-account deficit is a medium-term challenge. India’s consumer price inflation has held above 9 percent for 14 months through April. The rupee fell to a 10-month low today.

“The recent currency depreciation should keep the Reserve Bank of India alert as it potentially can add to the inflationary trend, or in the worst case, put a stop to easing core inflation momentum,” Kotak Mahindra Bank Ltd. (KMB) economists, including Indranil Pan, wrote in a research note today. “The risks to inflation, going forward, continue to be many.”

The yield on the 8.15 percent government notes due June 2022 rose five basis points, or 0.05 percentage point, to 7.44 percent in Mumbai, according to the central bank’s trading system. That’s the biggest increase since March 12.

The government issued a new 10-year note this month with a coupon rate of 7.16 percent, which yielded 7.20 percent today.

The shortfall in the current account, the broadest measure of trade, probably widened to a record of around 5 percent of gross domestic product, said Subbarao.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell 2 basis points to 7.13 percent, according to data compiled by Bloomberg.

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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