Indian Bonds Drop as Inflation, Supply Offset Exit Poll Optimism

India’s 10-year bonds fell, snapping a three-day gain, as faster inflation and an impending debt auction outweighed optimism over exit polls that signaled a clear victory for the main opposition party.

Consumer prices quickened for a second month in April, official data showed after the close of markets yesterday. India’s government plans to sell 200 billion rupees ($3.4 billion) worth of bonds maturing between 2022 and 2043 on May 16, the central bank said in a statement yesterday. The Bharatiya Janata Party and its allies probably won 249 to 340 seats in national elections, six exit polls show, with 272 needed for a majority. Voting began April 7 and ended yesterday.

The yield on the 8.83 percent notes due November 2023 jumped six basis points, or 0.06 percentage point, to 8.78 percent in Mumbai, the most since April 4, prices from the central bank’s trading system show. Local bond and currency markets are shut tomorrow for a holiday.

“The markets are concerned about inflation, and we have a large auction at the end of this truncated week,” Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance Co., said by phone from Mumbai. “That’s offsetting the positive sentiment lent by the exit poll results.”

Ten-year bonds rallied over the past month, with the yield slumping to the lowest since March 12 yesterday, on expectations of a stable government after the polls and as cash injections by the central bank and a strengthening rupee buoyed demand. The election results will be out on May 16.

India’s government sold 150 billion rupees of treasury bills at an auction today. The consumer-price index rose 8.59 percent from a year earlier, compared with 8.31 percent in March. The median estimate in a Bloomberg survey had predicted an 8.5 percent increase.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose two basis points today, the most since April 2, to 8.55 percent, data compiled by Bloomberg show.

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

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Robin Ganguly

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