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Indian Bonds Drop Most in 6 Weeks as Rupee Slide May Spur Prices

India’s bonds fell the most in more than six weeks on speculation the rupee’s slide to a record low will fuel inflation and deter the central bank from easing monetary policy.

The Reserve Bank of India, which has boosted borrowing costs 13 times since the start of 2010, will keep the repurchase rate unchanged at 8.5 percent, according to all 13 economists in a Bloomberg survey before a policy review on Dec. 16. Inflation that has held above 9 percent this year is tempering speculation that the central bank will cut the cash reserve ratio for banks to boost funds in the financial system, according to SBI Funds Management Pvt.

“Bonds have dropped as the rupee’s plunge isn’t giving any room for comfort on the inflation front,” said Rajeev Radhakrishnan, a Mumbai-based money manager at SBI Funds Management. “Hopes of a cut in the reserve ratio are fading.”

The yield on the 8.79 percent bonds due November 2021 rose eight basis points, or 0.08 percentage point, to 8.49 percent in Mumbai, according to the central bank’s trading system.

The benchmark wholesale-price index rose 9.11 percent in November from a year earlier, the commerce ministry said in a statement today. The median estimate of 26 economists in a Bloomberg News survey was for a 9.02 percent gain.

Lenders borrowed an average 749 billion rupees a day from the central bank this quarter to meet fund shortages, compared with 428 billion rupees in the previous three months, official data show.

Rupee Slide

The rupee tumbled 17 percent so far this year, the worst performance among 10 major Asian currencies, as economic growth decelerated to the slowest pace since 2009 and as Europe’s debt crisis hurt demand for emerging-market assets. The currency touched an all-time low of 53.8850 per dollar today.

India’s economy will return to a long-term growth pace of 9 percent, Prime Minister Manmohan Singh said in an interview in his office in Parliament House in New Delhi today. The slide in the rupee won’t diminish investor confidence, he said.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose 7 basis points to 7.80 percent, according to data compiled by Bloomberg.

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