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India’s Bonds Slump Most in a Week After CPI Inflation Tops 11%

India’s 10-year bonds slumped, with the yield rising the most in a week, on speculation accelerating consumer-price gains will add pressure on the central bank to raise interest rates for the third time this year.

CPI inflation was 11.24 percent in November, the fastest at least since the end of 2011, according to official data released yesterday. A separate report showed factory output fell 1.8 percent in October in the first contraction in four months. The Reserve Bank of India is “very uncomfortable” with the current level of inflation, Governor Raghuram Rajan told reporters in Kolkata after the figures were published.

The yield on the 8.83 percent government debt due November 2023 jumped seven basis points, or 0.07 percentage points, to 8.92 percent as of 9:37 a.m. in Mumbai, according to prices from the central bank’s trading system. That’s the biggest increase since Dec. 6. The rate climbed six basis points this week and 18 basis points so far in December.

Yesterday’s data “paint a stagflationary picture of the economy where despite weaker growth, inflation remains elevated,” Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, wrote in a research note today, adding that she expects the RBI to raise its benchmark repurchase rate by 25 basis points at a policy review on Dec. 18.

Wholesale prices probably rose 7 percent in November from a year earlier, matching October’s level that was the highest since February, according to the median estimate in a Bloomberg survey before data due Dec. 16. Rajan raised the repo rate by 25 basis points both in September and October, taking it to 7.75 percent, to curb price gains.

The one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, rose 11 basis points, the most since Nov. 11, to 8.54 percent today, data compiled by Bloomberg show. It added seven basis points this week.

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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