India’s benchmark bonds completed their biggest weekly loss in more than a year on speculation the central bank won’t cut interest rates further as deficient monsoon rains threaten to hurt crop output and stoke inflation.
The government this week lowered its forecast for the June-September rainfall to 88 percent of a 50-year average, from 93 percent in April, amid the emergence of an El Nino weather pattern. Reserve Bank of India Governor Raghuram Rajan, who cut the repurchase rate for the third time this year on Tuesday, said further action will hinge on the seasonal rains. Bonds were also hurt by the surge in yields on Treasuries to German bunds, according to IDBI Bank Ltd.
The yield on sovereign notes due July 2024 jumped 17 basis points from a week ago to close at 7.98 percent in Mumbai, prices from the RBI’s trading system show. That’s the biggest weekly increase for benchmark 10-year debt since April 2014. The rate fell three basis points on Friday. The rupee gained 0.1 percent to 63.7550 a dollar, snapping two weeks of losses, It advanced 0.4 percent on Friday.
“Bond markets are worried that there’d be an extended pause on rates after the RBI expressed concern about the monsoon,” said N.S. Venkatesh, chief financial officer at IDBI Bank in Mumbai.
The yield on the bonds due May 2025, the new 10-year security issued last month, climbed 15 basis points this week. Governor Rajan will keep the benchmark repo rate steady at 7.25 percent till the end of 2015, according to the median estimate in a Bloomberg survey of economists.
Indian primary dealers had to step in to salvage the scheduled government bond sales. The government raised 160 billion rupees ($2.5 billion) selling securities due 2023, 2025, 2033 and 2044 on Friday, with underwriters buying 8.89 billion rupees of the 2033 notes, according to a central bank statement.
India is facing the prospect of below-average rains for a second year in a row. Finance Minister Arun Jaitley Thursday sought to dispel concern by saying its impact on farm output in Asia’s third-largest economy may not be significant.