India’s 10-year government bond yield climbed to a two-month high on speculation quarterly corporate tax payments will drain cash from the financial system next month, damping demand for debt.
Three-month interbank borrowing rates climbed 32 basis points this month to 9.72 percent, signaling an increase in funding demand. The yield on notes due in a decade rose 12 basis points this week as Reserve Bank of India Governor Raghuram Rajan warned that inflation remains the biggest threat to the economy. He spoke in an interview on Feb. 23 in Sydney. India sold 100 billion rupees ($1.6 billion) of debt on Feb. 7 at the final auction for the year through March.
“Many investors are sitting on the sidelines before debt supply picks up in the next fiscal year,” said Prasanna Patankar, senior vice president at STCI Primary Dealer Ltd. in Mumbai. “However, this yield jump now seems a bit overdone.”
The yield on the 8.83 percent sovereign securities due in November 2023 rose four basis points, or 0.04 percentage point, to 8.92 percent in Mumbai, according to the central bank’s trading system. That’s the highest since Dec. 27.
Rajan has raised borrowing costs three times since taking office in September to counter price pressures. The benchmark repurchase rate was last boosted to 8 percent from 7.75 percent on Jan. 28. India’s consumer prices increased 8.79 percent in January, compared with 2.5 percent in China.
One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, increased four basis points to 8.73 percent, data compiled by Bloomberg show.