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India’s Bond Yield at 2012 High on Borrowing: Mumbai Mover

India’s bonds declined, pushing the 10-year yield to its highest level of 2012, on speculation the government will announce plans to borrow the majority of its annual debt target in the six months beginning April 1.

The finance ministry and the central bank will hold talks today to decide the fundraising calendar for the first half of the next fiscal year. The government will borrow a record 5.69 trillion rupees ($112 billion) in the 12 months through March 2013, compared with 5.1 trillion rupees this year, Finance Minister Pranab Mukherjee said March 16. Higher oil costs may deter policy makers from lowering interest rates next month, said M. Natarajan, the Mumbai-based head of treasury at Bank of Nova Scotia.

“Investors are jittery as the borrowing program could be frontloaded,” he said. “Oil prices also continue to be a worry.”

The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.50 percent in Mumbai, according to the central bank’s trading system. That’s the highest rate for the debt since Dec. 30. The government may borrow as much as 65 percent of its target in the first half, said Natarajan.

Brent crude oil has risen 17 percent this year to $125.50 a barrel. Reserve Bank of India Governor Duvvuri Subbarao raised the repurchase rate by 3.75 percentage points from the beginning of 2010 to October last year, lifting the benchmark to 8.5 percent in an attempt to restrain inflation. The next review is scheduled on April 17.

Fastest Inflation

Indian refiners have held gasoline prices unchanged since December, while diesel prices haven’t been raised since July. Surging crude prices may prompt refiners to raise fuel prices, stoking inflation, Natarajan said.

The central bank may cut the repurchase rate by less than 100 basis points in the 12 months beginning April, said Richard Iley, chief economist for Asia at BNP Paribas SA on March 19, reducing an earlier forecast for 200 basis points of reductions to reflect “stickier” inflation and a potential increase in the budget deficit.

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.

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 this month.

The government plans to reduce the budget deficit to 5.1 percent of gross domestic product in the next fiscal year from 5.9 percent this year, Mukherjee said on March 16, unveiling the government’s spending and taxation plans.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, decreased two basis points to 8.12 percent, data compiled by Bloomberg show.

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