India’s bonds fell the most in seven weeks as the central bank held its benchmark rate at the highest level since 2008, citing the risk of faster inflation.
Yields on debt due 2021 climbed to the most since January as the Reserve Bank of India kept the repurchase rate at 8.5 percent, as predicted by 19 of 22 economists in a Bloomberg survey. Higher oil prices, a budget deficit and a weaker rupee may spur inflation, the monetary authority said in a statement. Government data showed on Feb. 29 India’s economy grew the least in 11 quarters in the three months ended Dec. 31, fueling speculation borrowing costs will be lowered.
“Yields have moved up as investors are disappointed there is no rate cut,” said J. Moses Harding, Mumbai-based executive vice president at IndusInd Bank Ltd. “While taking note of growth slowdown, the RBI has also flagged inflation concerns.”
The yield on the 8.79 percent bonds due November 2021 jumped eight basis points, or 0.08 percentage point, to 8.36 percent in Mumbai, according to the central bank’s trading system. That is the biggest increase since Jan. 24.
The benchmark wholesale-price index rose 6.95 percent last month from a year earlier, after climbing 6.55 percent in January, the commerce ministry said yesterday. The Reserve Bank boosted the repo rate 13 times in the last two years to cool inflation. It was last increased by 25 basis points in October.
India imports about 80 percent of its oil. Brent crude, the benchmark for almost all of the nation’s imports, has surged 11 percent this year to $124.85 a barrel. The rupee lost 10 percent in the past 12 months, the worst performance among Asia’s 10 most-traded currencies excluding the yen.
“Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions,” the Reserve Bank said today.
Inflation in Asia’s third-largest economy remains the fastest in the BRIC group, which also includes Brazil, Russia and China, eroding purchasing power in a nation where more than two-thirds of the population lives on less than $2 a day.
India’s budget gap widened to 4.35 trillion rupees ($86.3 billion) in the 10 months through January, exceeding the government’s target of 4.13 trillion rupees for the year ending March 31, the most recent data on the website of the Controller General of Accounts show. A year earlier, the shortfall was only 58.3 percent of the annual goal.
The deficit may increase to 6.1 percent of gross domestic product this fiscal year, according to Nomura Holdings Inc., more than Finance Minister Pranab Mukherjee’s goal of 4.6 percent. Investors from ICICI Securities Primary Dealership Ltd. to Yes Bank Ltd. predict Mukherjee will announce plans on March 16 to cut the deficit to 5 percent of gross domestic product from an estimated 5.8 percent this fiscal year, a Bloomberg survey showed this week.
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose 12 basis points to 8.17 percent, data compiled by Bloomberg show. The rate dropped 14 basis points in the last three days after the Reserve Bank cut the reserve requirements for banks by 75 basis points to 4.75 percent of deposits with effect from March 10.