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Indian Rate Swaps Increase as Weak Monsoon Spurs Inflation Risk

India’s one-year interest-rate swaps completed a third weekly advance on concern a shortage of rainfall will hurt farm output and spur inflation, reducing the scope for monetary easing by the central bank.

The monsoon, which accounts for more than 70 percent of India’s annual rains, has been 41 percent lower than the 50-year average since June 1, the weather department said yesterday. The weak start to the June-September season is delaying planting of crops from rice to soybeans and lentils, threatening to push up food prices, which make up about 50 percent of India’s consumer-inflation basket.

“Monsoons are a looming worry for Indian bond markets given the implications for the inflation outlook,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “This only affirms our view that the Reserve Bank of India won’t be cutting interest rates at any time in 2014.”

The swaps, derivative contracts used to guard against swings in funding costs, rose two basis points, or 0.02 percentage point, this week to 8.38 percent in Mumbai, data compiled by Bloomberg show. They were little changed today.

Indian primary dealers bought unsold sovereign debt at an auction for the first time in 2014 today, fueling speculation investors sought higher yields as the weak monsoon threatened to spur inflation.

Ten-year bonds reversed earlier gains after the auction results. The yield on the 8.83 percent sovereign notes due November 2023 rose two basis points today and this week to 8.75 percent, according to the central bank’s trading system. It dropped as low as 8.71 percent earlier in the day.

RBI Governor Raghuram Rajan has raised the benchmark repurchase rate by 75 basis points since taking charge in September to rein in consumer-price gains. He left the rate unchanged at 8 percent for a second straight meeting on June 3.

Wholesale-price inflation in India quickened to 6.01 percent in May, the fastest since December. Consumer prices increased 8.28 percent in May from a year earlier, the slowest pace in three months.

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