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India 10-Year Bonds Slump After Inflation Unexpectedly Quickens

Oct. 14 (Bloomberg) -- India’s 10-year bonds fell, with the yield rising the most in three weeks, after a report showing inflation unexpectedly accelerated led to concern the central bank will increase interest rates.

Wholesale prices rose 6.46 percent in September from a year earlier, compared with a 6.1 percent gain in August, official data showed today. That’s more than the 6 percent median estimate of 33 economists in a Bloomberg survey and the fastest pace in seven months. Reserve Bank of India Governor Raghuram Rajan boosted the repurchase rate to 7.5 percent last month, while figures issued Oct. 11 showed factory output growth slowed more than predicted.

The yield on the 7.16 percent government notes due May 2023 jumped nine basis points, or 0.09 percentage point, to 8.58 percent in Mumbai, according to prices from the central bank’s trading system. The rate dropped 22 basis points in the past two weeks.

“If consumer prices also stay on the higher side, the markets would stare at the possibility of a 25-50 basis point increase in the repo rate,” said Sagar Shah, associate vice president for treasury at Ratnakar Bank Ltd. in Mumbai. “The factory output numbers are a clear sign that growth is weak.”

Data to be released after the markets close today may show consumer prices rose 9.5 percent in September, after a 9.52 percent advance a month earlier, a separate Bloomberg survey shows.

Output at factories, utilities and mines climbed 0.6 percent in August from a year earlier, compared with a revised 2.75 percent increase the previous month, the Statistics Ministry said in a statement after markets closed on Oct. 11. The median of 33 estimates in a Bloomberg survey was for a 2 percent gain.

Bond Slump

Ten-year notes slumped in each of the last four months, the longest such run since 2009, as the RBI raised interest rates and curbed funding support to banks to stem the rupee’s slide. The currency has rebounded almost 12 percent since reaching a record low of 68.845 per dollar on Aug. 28, enabling the RBI to ease some of the liquidity curbs.

Rajan reduced the marginal standing facility by 50 basis points to 9 percent last week, the second cut in less than a month. He decreased the bank rate to 9 percent, while keeping the main repurchase rate at 7.5 percent. The RBI also bought bonds through open-market purchases, raising cash supply in the banking system.

The RBI chief unexpectedly raised the key repo rate by 25 basis points on Sept. 20, the first increase since 2011, to curb the fastest consumer-price increases among the four largest emerging markets. He also cut the marginal standing facility rate to 9.5 percent from 10.25 percent the same day as part of steps to ease cash supply.

One-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose five basis points to 8.43 percent, data compiled by Bloomberg show. It fell in each of the past six weeks.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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