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Indian Bond Yields Hold Near Two-Month High on Inflation Threat

Feb. 25 (Bloomberg) -- India’s 10-year government bond yield stayed near the highest level in almost two months as the central bank governor warned that inflation remains the biggest threat to economic growth.

Reining in price gains is the Reserve Bank of India’s top challenge, Raghuram Rajan, who has raised borrowing costs three times since taking office in September, said in a Feb. 23 interview in Sydney. Any action will depend on data, he added. Wholesale prices rose 5.05 percent in January from a year earlier, the least since May, and the consumer-price index increased 8.79 percent, the smallest gain in two years. The decelerating trend in the wholesale-price index may not last, according to Standard Chartered Plc.

The yield on the 8.83 percent sovereign notes due November 2023 slipped one basis point, or 0.01 percentage point, to 8.87 percent in Mumbai, according to prices from the central bank’s trading system. The rate, which closed yesterday at the highest since Dec. 27, climbed as high as 8.92 percent intraday.

“Yields have hardened in the current scenario where the central bank is in inflation-fighting mode, and there is uncertainty related to elections,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “Bonds saw some value buying later in the trading session as higher yields attracted investors.”

Rajan last raised the benchmark repurchase rate to 8 percent from 7.75 percent on Jan. 28, saying in the policy statement that more increases are unlikely in the “near term” should inflation cool as expected. India is preparing for elections due by May.

The WPI’s slowing is due mainly to a decrease in vegetable prices, Anubhuti Sahay, a Mumbai-based economist at Standard Chartered, said in a Feb. 14 interview. “Once the reduction in vegetable prices reverses, the move up in inflation can be very sharp,” she said.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, were unchanged at 8.69 percent, data compiled by Bloomberg show.

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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