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India 10-Year Bonds Set for Fourth Monthly Loss on Rate Surprise

India’s 10-year bonds headed for a fourth month of losses, the longest run since 2009, after the central bank unexpectedly boosted its benchmark interest rate.

Reserve Bank of India Governor Raghuram Rajan raised the repurchase rate to 7.5 percent from 7.25 percent on Sept. 20, a decision predicted by none of 36 analysts surveyed by Bloomberg. The move came after official data showed wholesale prices accelerated to a six-month high of 6.1 percent in August. “We want to fight against inflation,” Rajan said in Mumbai after the rate decision, adding the goal is to slow the pace of gains to below 5 percent.

The yield on the 7.16 percent sovereign bonds due May 2023 rose eight basis points, or 0.08 percentage point, this month to 8.69 percent, as of 10:06 a.m. in Mumbai, according to prices from the central bank’s trading system. The rate fell two basis points today and advanced 124 basis points this quarter.

“There will be a little bit more pain as the central bank has linked rate action to inflation, which looks to have an upward bias,” said Harihar Krishnamoorthy, treasurer at the Indian unit of FirstRand Ltd. in Mumbai. “Markets are pinning their hope more on liquidity coming in.”

The central bank said last week it will take steps as required to ensure adequate cash supply in the financial system. The RBI is injecting about 1.5 trillion rupees ($24 billion) into markets every day via money-market operations and export-credit refinance, it said in a statement on Sept. 25.

Currency Volatility

The assurance on the cash supply “should be a near-term respite, while monetary policy bias and forex volatility continue to be sources of concern,” Barclays Plc analysts including Mumbai-based Siddhartha Sanyal wrote in a report last week.

One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, is 15.16 percent, the highest among Asian currencies after Indonesia’s rupiah, data compiled by Bloomberg show. The rupee climbed 4.8 percent against the dollar this month, the most in a year.

One-year interest-rate swaps, derivative contracts used to guard against fluctuations in funding costs, slumped 83 basis points this month to 8.75 percent, according to data compiled by Bloomberg. The rate was unchanged today.

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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