The yield on Indian sovereign bonds due 2024 rose to the highest level since January and the rupee weakened as a surge in oil prices raised concern over inflation and the central bank’s ability to cut interest rates.
Brent crude has climbed 3.9 percent in the past two days, threatening to raise import costs for India, which gets about 80 percent of its oil from overseas. Prices rallied 21 percent in April, following a 49 percent plunge in the year through March that helped slow consumer inflation and prompted the Reserve Bank of India to lower borrowing costs. Local stocks slumped on Wednesday and the rupee retreated for a fourth day.
“Higher oil prices are becoming a cause for concern for Indian markets,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai. “There’s been some selling of bonds in the last few days as the rupee’s weakness is also weighing on sentiment.”
The yield on the 8.4 percent notes due July 2024, the current 10-year benchmark, rose four basis points, or 0.04 percentage point, to 7.89 percent in Mumbai, prices from the RBI’s trading system show.
Demand for the 2024 bonds has been hurt also by speculation that India will soon issue a new 10-year benchmark security, according to HDFC Standard Life Insurance Co.
“Investors are reshuffling their portfolio to make room for the new paper,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life in Mumbai.
The rupee dropped 0.2 percent to 63.54 a dollar, according to prices from local banks compiled by Bloomberg. It weakened 1.5 percent in April in Asia’s worst performance as data showed India’s trade deficit widened the previous month amid a slump in exports.
The central bank has cut interest rates twice in 2015.