India 2022 Bond Yield at Six-Week High as Rate-Cut Scope Limited

The yield on India’s 2022 bonds rose to a six-week high on speculation accelerating inflation gives the central bank less room to reduce borrowing costs.

The Reserve Bank of India lowered its repurchase rate to 7.50 percent from 7.75 percent on March 19 and said high food costs are “exacerbating the challenge for monetary management in anchoring inflationary expectations.” Dravida Munnetra Kazhagam, one of nine partners in the ruling alliance, said the same day it would stop supporting the government over its approach to alleged war crimes in Sri Lanka, leaving Prime Minister Manmohan Singh more reliant on regional parties.

“The central bank seems to have cut rates reluctantly as inflation is still a concern,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “The prevailing political uncertainty also raises questions about fiscal consolidation.”

The yield on the 8.15 percent bonds due June 2022 rose one basis point to 7.94 percent in Mumbai, according to the central bank’s trading system. That’s the highest level since Feb. 4.

Wholesale-price inflation unexpectedly accelerated to 6.84 percent in February from a year earlier, while consumer prices rose 10.91 percent, official data show. Finance Minister Palaniappan Chidambaram vowed last month to cut the fiscal deficit to 4.8 percent of gross domestic product in the year beginning April 1, from 5.2 percent this year.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose two basis points, or 0.02 percentage point, to 7.56 percent, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.