Indian Bonds Post Biggest Weekly Drop This Month on Inflation

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India’s 10-year sovereign bonds posted their biggest weekly drop this month on speculation rising inflation will prevent further interest-rate cuts.

Consumer prices climbed 5.4 percent in June from a year earlier, the fastest pace in nine months, official data showed this week. Price pressures could worsen as deficient monsoon rains threaten to hurt farm output and stoke food costs, which account for about half of the inflation basket. The government sold 150 billion rupees ($2.4 billion) of notes as planned at a weekly auction Friday.

The yield on the securities due May 2025 rose three basis points this week, the most since the period ended June 26, to 7.83 percent in Mumbai, according to prices from the central bank trading system. It fell one basis point on Friday. The rupee fell this week.

“The increase in CPI inflation is a matter of concern,” said Sanjay Kumar, chief investment officer at PNB MetLife India Insurance Co. in Mumbai. “The below-average monsoons have also damped sentiment in the fixed-income market.”

The June-September seasonal rains account for more than 70 percent of the annual precipitation. Showers, which were 16 percent in surplus at the end of last month, are now 7 percent below normal as the El Nino weather pattern, which brings dry weather to Asia, tightens its grip on the region. India is among nations most at risk from El Nino-linked increases in food prices, according to HSBC Holdings Plc.

Reserve Bank of India Governor Raghuram Rajan has cut benchmark borrowing costs three times in 2015 and linked further policy action to the strength of the monsoons.

The rupee weakened 0.1 percent from July 10 and rose 0.1 percent on Friday to 63.4750 a dollar, according to prices from local banks compiled by Bloomberg. The currency snapped a two-week advance as India’s exports fell for a seventh month in June and the Federal Reserve said it’s on track to raise interest rates this year.

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