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India Bonds Drop Most in 2 Months as RBI Keeps Rates Unchanged

Indian government bonds fell the most in nearly two months after the central bank unexpectedly left interest rates unchanged, citing inflation risks.

Yields rebounded from a one-year low as Governor Duvvuri Subbarao left the benchmark repurchase rate at 8 percent at a policy review today. Only four of 25 economists in a Bloomberg News survey predicted the outcome, with 19 expecting a 0.25 percentage-point cut and the remainder a half-point reduction. Inflation accelerated to 7.55 percent in May, according to official data, the fastest pace in the BRIC group of largest emerging markets that also includes Brazil, Russia and China.

“Investors were obviously pricing in a rate cut as growth is slowing and the decline in bonds reflects that disappointment,” said Paresh Nayar, head of money-market and currency trading in Mumbai at FirstRand Ltd., a unit of South Africa’s second-largest banking group. “Inflation still remains a concern and bonds could trade in a wide range over the next one month.”

The yield on the government’s 8.15 percent bonds due June 2022 rose 12 basis points, or 0.12 percentage point, to 8.17 percent in Mumbai, according to the central bank’s trading system. That is the most the rate on a benchmark 10-year note has increased since April 20.

Nayar predicts the 10-year bond yield will range between 8 percent and 8.20 percent until the next review on July 31.

The monetary authority last reduced the repo rate by 50 basis points to 8 percent in April after raising it 13 times from March 2010 to October 2011. The reserves ratio for banks, kept unchanged today, has been cut by 125 basis points this year to 4.75 percent.

G20 Summit

The central bank’s decision to hold rates contrasts with rate cuts in Brazil and China in the past three weeks as the impact of Europe’s turmoil fans through Asia and dominates the agenda of a Group of 20 summit starting in Mexico today.

Asia’s third-largest economy expanded 5.3 percent from a year earlier, the least in nine years, official data showed on May 31. Factory output rose 0.1 percent in April from a year earlier after a revised 3.2 percent drop in March, official data showed last week.

Fitch Ratings lowered India’s rating outlook to negative from stable, which cited the heightened risk of a deterioration in growth potential and limited progress on paring the budget deficit. The agency affirmed its sovereign rating at BBB-, the lowest investment-grade level. Standard & Poor’s warned on June 11 that it may cut India’s rating after lowering the outlook to negative in April.

‘Weak Finances’

“Against the backdrop of persistent inflation pressures and weak public finances, there’s an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy,” Art Woo , a Hong Kong-based director of sovereign ratings at Fitch, said in a statement.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, jumped 25 basis points to 7.83 percent, the highest level this month, data compiled by Bloomberg show.

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