India’s 10-Year Bonds Drop After Biggest Weekly Gain Since 2008

India’s 10-year government bonds dropped after completing their best week since 2008 as the rupee extended two straight weeks of losses.

The yield on the notes due May 2023 fell 63 basis points last week as the Reserve Bank of India announced a plan to buy long-dated debt after a cash squeeze it created to support the rupee pushed the 10-year rate to a 12-year high. The currency, which sank to a record 65.56 per dollar on Aug. 22, lost 1.5 percent today, the most in a week.

“Given that emerging-market currencies remain under pressure, we don’t recommend chasing the rally in Indian government bonds at current levels,” Rohit Arora, a Singapore-based fixed-income strategist at Barclays Plc, wrote in a report. “While the RBI’s shift in strategy last week could have marked a bottom for the bond market, we don’t expect a sharp rally from current levels and look for 10-year yields to be range-bound in the near term.”

The yield on the 7.16 percent bonds due 2023 rose seven basis points, or 0.07 percentage point, to 8.34 percent in Mumbai, according to prices from the central bank’s trading system.

A weaker currency stokes inflation as India imports about 80 percent of its oil needs. The rupee completed a second week of losses on Aug. 23 despite a series of measures by policy makers since mid-July to stem its slide.

The yield on the 2023 notes surged 75 basis points in July, the most for a 10-year benchmark bond since March 2009, and touched 9.48 percent on Aug. 20, the highest since 2001, data compiled by Bloomberg show. Bonds slumped as the RBI raised two interest rates and tightened cash in the banking system.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, advanced five basis points to 9.52 percent today, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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