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Indian Bonds Decline for Second Week on Rate Increase, Fed Taper

Jan. 31 (Bloomberg) -- India’s 10-year bonds completed a second weekly loss after the central bank unexpectedly raised borrowing costs and the U.S. Federal Reserve further cut monetary stimulus that’s buoyed emerging markets.

The Fed said Jan. 29 it will trim monthly bond purchases by $10 billion to $65 billion from February, after a similar reduction in January. Reserve Bank of India Governor Raghuram Rajan raised the benchmark repurchase rate to 8 percent from 7.75 percent on Jan. 28, a move predicted by only three of 45 analysts surveyed by Bloomberg. The rest expected no change.

The yield on the 8.83 percent government securities due November 2023 climbed three basis points, or 0.03 percentage point, this week to 8.77 percent in Mumbai, according to the central bank’s trading system. The rate touched 8.52 percent, the lowest since October, on Jan. 20.

“Bonds have lost some of their momentum in the last two weeks,” Arvind Chari, head of fixed income at Quantum Advisors Pvt., said by phone. “We expect 10-year notes to trade rangebound in the near-term.”

Global investors pulled an unprecedented $8.03 billion from rupee-denominated debt in 2013 on the prospect of a U.S. stimulus cut. Funds based abroad sold a net $746 million of notes this week through Jan. 29, exchange data show.

Debt Auction

India sold 140 billion rupees ($2.2 billion) of bonds as planned at an auction today, the RBI said in a statement. Ten-year bonds advanced, with the yield dropping five basis points to 8.77 percent, after climbing to as high as 8.88 percent intraday.

Rajan’s decision to raise rates came a week after a panel he appointed proposed making inflation the “predominant objective” of monetary policy for the first time. The committee suggested reducing consumer-price inflation to 8 percent within one year and 6 percent by 2016. CPI gains measured 9.87 percent in December.

“The risk of further hikes cannot be ruled out,” analysts at Standard Chartered Plc, including Mumbai-based Anubhuti Sahay, wrote in a research note after the RBI’s rate decision. They cut their outlook for local government bonds to neutral from positive.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose 31 basis points from a week ago to 8.72 percent, the most since August, data compiled by Bloomberg show. They rose one basis point today.

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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