India’s 10-year bonds fell, pushing the yield to the highest level this year, on speculation the central bank will tighten monetary policy further to arrest a slide in the rupee.
The Reserve Bank of India increased the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent last week, while keeping the key repurchase rate unchanged after cutting it in May. The rupee fell by the most in two weeks yesterday and lost 7.7 percent in 2013. A weaker currency makes imports costlier and threatens to spur gains in consumer prices, which have stayed close to 10 percent for more than a year.
“There are fears the central bank may reverse its policy stance as the rupee doesn’t seem to be behaving in the desired manner even after the recent measures,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “The bond markets are pretty jittery.”
The yield on the 7.16 percent bonds due May 2023 rose one basis point to 8.1 percent as of 10:08 a.m. in Mumbai, according to the central bank’s trading system. That’s the highest for a benchmark 10-year note since Dec. 28, 2012. The rate surged 41 basis points last week, the most for a 10-year government security since December 2009, data compiled by Bloomberg show.
Policy tightening by the RBI will cool growth in Asia’s third-largest economy, which is already expanding at the slowest pace in a decade, and strain public finances, according to a Nomura Holdings Inc. research note dated July 19. The central bank’s next review is on July 30.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose four basis points, or 0.04 percentage point, to 8.85 percent, data compiled by Bloomberg show. The rate surged 110 basis points last week.
To contact the reporter on this story: Shikhar Balwani in Mumbai at firstname.lastname@example.org