India’s 10-year bonds completed their worst week this month after the central bank unexpectedly boosted its benchmark interest rate on Sept. 20.
The yield on notes due 2023 touched the highest level in a month after Reserve Bank of India Governor Raghuram Rajan raised the repurchase rate to 7.5 percent from 7.25 percent to curb inflation, the first increase since 2011. Bonds pared declines after the government announced its borrowing plan for the second half of the year through March 2014, which showed it will keep annual debt sales within target.
The yield on the 7.16 percent sovereign debt due May 2023 jumped 13 basis points, or 0.13 percentage point, this week to 8.71 percent in Mumbai, according to prices from the central bank’s trading system. It climbed to 8.85 percent on Sept. 23, the highest since Aug. 28.
“Along with the hardening of short-term rates, the unexpected rate hike late last week also sent the long-term bond yields higher,” DBS Bank Ltd. economists including Singapore-based Radhika Rao wrote in a note today. “The government’s decision to stick with the second-half borrowing schedule triggered a shallow pullback, but failed to completely soothe nerves. Concerns here are that the borrowing plan might be raised later this year if the fiscal deficit overshoots the budgeted assumptions.”
India will borrow 2.35 trillion rupees ($38 billion) in the six months through March, Economic Affairs Secretary Arvind Mayaram said on Sept. 23.
Declines in bonds were also curbed after the central bank said it will take steps as required to ensure adequate cash supply in the financial system. The RBI is injecting about 1.5 trillion rupees into markets every day via money-market operations and export-credit refinance, it said in a statement on Sept. 25.
The central bank’s assurance on cash “should be a near-term respite for government bonds, while monetary policy bias and forex volatility continue to be sources of concern,” Barclays Plc analysts including Mumbai-based Siddhartha Sanyal wrote in a report this week.
One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, is the highest among Asian currencies after Indonesia’s rupiah, data compiled by Bloomberg show.
One-year interest-rate swaps, derivative contracts used to guard against fluctuations in funding costs, fell nine basis points this week to 8.75 percent, according to data compiled by Bloomberg.