India’s 10-Year Bonds Drop as Wholesale Inflation Accelerates

Indian government bonds due 2023 fell, pushing the yield to a two-week high, as data showed wholesale-price inflation quickened at the fastest pace since December.

Prices climbed 6.01 percent in May from a year earlier, a government report showed today. The median forecast in a Bloomberg survey of analysts was 5.34 percent. The higher reading comes amid concern that a rally in global oil prices will further fuel inflation in India, which imports about 80 percent of its needs. Bond losses were limited as a central bank adviser said interest rates in India have peaked and, while a pause in rates is needed for now amid rising commodity-price volatility, borrowing costs should decline later.

The yield on the 8.83 percent notes due November 2023 jumped five basis points, or 0.05 percentage point, to 8.65 percent in Mumbai, prices from the central bank’s trading system show. That’s the highest since the June 2 close at 8.66 percent.

“The spike in oil prices has renewed inflation concerns,” Mohan Shenoi, president for group treasury and global markets at Kotak Mahindra Bank Ltd. in Mumbai, said by telephone. “There will be some stress for the bond market before this passes.”

Oil climbed as escalating violence in Iraq stoked concern supplies will be disrupted. Brent crude also advanced. The higher-than-expected WPI print will raise worries about the trajectory of India’s CPI inflation, said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai.

Consumer prices rose 8.28 percent in May, compared with 8.59 percent in April. The RBI aims to slow the gains to 8 percent by January 2015 and 6 percent a year later.

Governor Raghuram Rajan, who has raised the benchmark repurchase rate by 75 basis points since taking charge in September to rein in prices, left it unchanged at 8 percent for a second straight meeting on June 3. The RBI has said it could ease monetary policy should inflation slow faster than anticipated.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose five basis points today to 8.31 percent, data compiled by Bloomberg show. They jumped 11 basis points last week.

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 Ravil Shirodkar

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