Indian Bonds Decline as Monsoon Forecast Fuels Inflation Concern

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Indian sovereign bonds fell the most in three weeks on speculation weak monsoon showers will inflate food costs and dissuade the central bank from cutting interest rates.

The weather office Tuesday tempered optimism spurred by above-average rain this month, predicting that overall precipitation will fall short in the June-September period as the El Nino phenomenon brings in dry weather. Reserve Bank of India Governor Raghuram Rajan, who lowered the repurchase rate on June 2 in the third reduction this year, has linked future actions to the strength of the monsoon.

“It’s too early to make any conclusion on monsoon rains and their impact on inflation,” said Harish Agarwal, a Mumbai-based fixed-income trader at the Indian unit of South African lender FirstRand Ltd. The RBI will watch the impact on commodity prices, which will guide its rate decisions, he said.

The yield on sovereign debt due May 2025, the new 10-year benchmark, climbed six basis points to 7.80 percent in Mumbai, central bank trading system prices show. The rate rose nine basis points this week, partly tracking a surge in global yields, according to FirstRand.

Consumer prices advanced 5.01 percent in May from a year earlier, after a 4.87 percent rise in April, official data show. The monsoon irrigates more than half of India’s farmland and a shortfall can increase food prices, which account for about 50 percent of the nation’s consumer price index.

The rupee was little changed at 63.5975 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. The Indian currency has gained 0.4 percent this month.

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