Indian Bonds Decline on Concern Fed Taper May Worsen Outflows

India’s 10-year government bonds fell, sending the yield to a three-month high, after Federal Reserve officials indicated they will reduce monetary stimulus that’s buoyed demand for emerging-market assets.

The Fed may cut its $85 billion monthly bond-buying program “in coming months” as the U.S. economy improves, minutes of their October meeting released yesterday showed. Overseas funds pared holdings of rupee-denominated debt by more than $14 billion from an all-time high of $38.5 billion in mid-May.

The yield on the 7.16 percent notes due May 2023 jumped six basis points, or 0.06 percentage point, to 9.10 percent as of 9:21 a.m. in Mumbai, according to prices from the central bank’s trading system. That’s the highest since closing at 9.23 percent on Aug. 19.

The Federal Open Market Committee’s minutes “revived fears that the U.S. quantitative easing taper is still on the cards,” DBS Bank Ltd. economists, including Singapore-based Radhika Rao, wrote in a research note. “A persistent climb” in India’s wholesale and consumer-price inflation “in the months ahead will underscore the need for further rate hikes,” they wrote.

The RBI will auction new 10-year securities tomorrow.

Wholesale prices rose 7 percent in October from a year earlier, the fastest pace since February, while consumer-price inflation accelerated to 10.1 percent, separate reports showed last week. The Reserve Bank of India will study data before deciding whether to raise the benchmark rate for a third straight meeting, Governor Raghuram Rajan said Nov. 13. He boosted the key repurchase rate by 25 basis points to 7.75 percent on Oct. 29, the second consecutive increase.

U.S. policy makers “generally expected that the data would prove consistent with the FOMC’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months,” according to the record of the Oct. 29-30 gathering, released yesterday in Washington.

India’s one-year interest-rate swaps, derivative contracts used to guard against fluctuations in funding costs, rose three basis points to 8.65 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: James Regan at jregan19@bloomberg.net

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