India 10-Year Bonds Drop as Rupee Plunge Spurs Inflation Concern

India’s 10-year government bonds dropped for a third day as the rupee tumbled to a record low, fueling concern inflation will accelerate.

The currency sank as much as 2.3 percent to an unprecedented 65.82 per dollar, taking its loss this quarter to more than 9 percent. A weaker currency stokes inflation as India imports about 80 percent of its oil needs. Wholesale prices rose 5.79 percent in July from a year earlier, compared with 4.86 percent the previous month, official data show.

The yield on the 7.16 percent bonds due May 2023 jumped 12 basis points, or 0.12 percentage point, to 8.46 percent as of 12:03 p.m. in Mumbai, prices from the central bank’s trading system show. The yield has climbed 101 basis points since the end of June, touching a 12-year high of 9.48 percent on Aug. 20.

“There is continued pressure on the currency, which is causing problems on the inflation front,” said Pradeep Madhav, the Mumbai-based managing director of STCI Primary Dealer Ltd. “The overall scenario looks pretty bleak.”

The rupee completed a second week of losses on Aug. 23 after a series of measures by policy makers since mid-July failed to stem its slide. The Reserve Bank of India raised two interest rates and tightened the supply of cash in the banking system. A spike in yields after the cash squeeze prompted the RBI to announce a plan to buy long-dated debt last week.

Strategy Shift

“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,” Rohit Arora, a Singapore-based fixed-income strategist at Barclays Plc, wrote in a report released yesterday.

India will sell 170 billion rupees ($2.6 billion) of bonds maturing between 2019 and 2041 on Aug. 30. It will offer 10 billion rupees of inflation-indexed notes today, according to RBI statements.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, advanced 10 basis points to 9.62 percent, data compiled by Bloomberg show.

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.