Indian Bonds Cap Worst Week Since April on Inflation Concern

India’s 10-year government bonds completed their biggest weekly loss since April on concern below-normal rainfall and rising global oil prices will fuel inflation, reducing scope for monetary easing.

Brent crude headed for a second weekly advance as escalating violence in Iraq threatens to hurt supplies. India, which imports about 80 percent of its oil, already faces the prospect of inadequate monsoon rainfall impacting farm output and thwarting efforts by policy makers to curb price gains. The nation sold 150 billion rupees ($2.5 billion) of debt at an auction today.

The yield on the 8.83 percent notes due November 2023 has jumped 13 basis points, or 0.13 percentage point, this week to 8.72 percent in Mumbai, according to prices from the central bank’s trading system. That’s the most since the week ended April 4. It increased four basis points today.

“The spurt in oil prices has compounded India’s problems as a potentially weaker monsoon already caused inflation worries,” Sagar Shah, deputy vice-president for treasury at RBL Bank in Mumbai, said by phone. “Investors don’t wish to go long until the Iraq crisis is seen resolving.”

The monsoon, which accounts for more than 70 percent of India’s annual rainfall, has been 42 percent lower than the 50-year average since June 1, the weather department said on its website yesterday.

While this week’s decline has pared the best quarterly advance for 10-year bonds in a year, Barclays Plc and Nomura Holdings Inc. predict the notes will extend gains as Prime Minister Narendra Modi’s pledge to improve fiscal discipline attracts record inflows. Global funds have poured $10.5 billion into Indian debt so far this year through June 18, exceeding the highest annual total of $10.1 billion in 2010.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, climbed 10 basis points this week and three basis points today to 8.36 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 Thomas Kutty Abraham

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