Indian Underwriters Buy Unsold Debt at Sale Amid Inflation Woes

Indian primary dealers bought unsold sovereign debt at an auction for the first time in 2014, fueling speculation investors sought higher yields as a weak monsoon threatened to spur inflation. Bonds erased gains.

The government raised 150 billion rupees ($2.5 billion) selling securities due 2020, 2023, 2032 and 2042 today, of which underwriters bought 9.62 billion rupees of the six-year notes, according to a central bank statement. On June 25, it missed its target at an auction of 364-day bills, raising 18.7 billion rupees instead of the planned 60 billion rupees.

“This shows investors demanded higher yields given the prospect of a weaker monsoon driving up food prices,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “This is a signal from the Reserve Bank of India that they want a steeper yield curve and don’t want short-term rates to be higher.”

The monsoon, which accounts for more than 70 percent of India’s annual rains, has been 41 percent lower than the 50-year average since June 1, the weather department said yesterday. The weak start to the June-September season is delaying planting of crops from rice to soybeans and lentils, threatening to push up food prices, which make up about 50 percent of India’s consumer-inflation basket.

Ten-year bonds erased an earlier advance after the auction results were published. The yield on the 8.83 percent sovereign notes due November 2023 was little changed from yesterday at 8.74 percent as of 3:30 p.m. in Mumbai, according to the central bank’s trading system. It dropped as low as 8.71 percent earlier. The last time primary dealers bought government notes at an auction was on Dec. 27.

Inflation Quickens

Wholesale-price inflation in India quickened to 6.01 percent in May, the fastest since December. Consumer prices increased 8.28 percent in May from a year earlier, the slowest pace in three months.

India’s one-year interest-rate swaps headed for a third weekly increase on concern faster inflation amid a shortage of rainfall will reduce room for monetary easing by the central bank. RBI Governor Raghuram Rajan has raised the benchmark repurchase rate by 75 basis points since taking charge in September to rein in consumer-price gains. He left the rate unchanged at 8 percent for a second straight meeting on June 3.

The swaps, derivative contracts used to guard against swings in funding costs, rose one basis point, or 0.01 percentage point, this week to 8.37 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 Anil Varma, Sam Nagarajan

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