India’s Bonds Snap Two-Day Gain as Rupee Seen Fueling Inflation

Indian bonds due 2022 snapped a two-day advance on concern a slide in the rupee will fuel inflation, limiting room for the central bank to cut interest rates.

Reserve Bank of India Governor Duvvuri Subbarao kept the repurchase rate unchanged at 7.25 percent yesterday, saying a weakening exchange rate would spur price increases. The rupee has lost 7.1 percent this quarter, the worst performer among Asia’s 11 most-traded currencies. India’s consumer-price index rose 9.31 percent in May, official data showed last week, while a similar gauge gained 2.1 percent in China.

“The currency remains a worry” for the bond market, said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. (DEVB) in Mumbai. “While there is hope that the central bank will cut rates, there are several conditions attached to it. There are no positive triggers for the bond markets to rally.”

The yield on the 8.15 percent notes due June 2022 rose two basis points, or 0.02 percentage point, to 7.47 percent as of 10 a.m. in Mumbai, according to the central bank’s trading system.

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the central bank said in its statement yesterday, adding it stands ready to “respond rapidly and appropriately to any adverse developments.”

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the RBI said.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose one basis point to 7.21 percent, data compiled by Bloomberg show. The fixed payment to lock in borrowing costs for a year is six basis points below the RBI’s 7.25 percent repo rate. The gap had widened to as much as 17 basis points on May 20.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net;

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

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