Indian Bonds Drop as Rupee’s Weakness Poses Inflation Threat

India’s bonds fell for a second day on concern the rupee’s slide to the lowest level in almost a year will increase the cost of imports and reduce the central bank’s room to cut interest rates.

The currency touched 57 per dollar today for the first time since June 2012, pressured by a record current-account deficit and the prospects of reduced capital inflows following Federal Reserve Chairman Ben S. Bernanke’s statement last month that the monetary authority may reduce asset purchases. The Reserve Bank of India cut the repurchase rate in May, March and January by a combined 75 basis points to 7.25 percent. The next review is due on June 17.

“We are more or less done with rate cuts, given the weak rupee,” said Arvind Chari, a Mumbai-based senior fund manager at Quantum Asset Management Co. “The RBI is likely to aim for price stability as the external sector is stretched.”

The yield on the 7.16 percent government securities due May 2023 rose one basis point at 7.22 percent in Mumbai, according to the central bank’s trading system. The yield on the 8.15 percent note due June 2022 was little changed at 7.41 percent.

The nation’s balance of payments is under stress and retail inflation remains elevated, Reserve Bank Governor Duvvuri Subbarao said last week. The shortfall in the current account, the broadest measure of trade, probably widened to a record 5 percent of gross domestic product in the year ended March 31, Subbarao said.

India, the world’s largest gold buyer, increased a tax on bullion imports yesterday to curb the current-account deficit. The duty will rise to 8 percent from 6 percent, effective immediately, Revenue Secretary Sumit Bose said yesterday.

The one-year interest-rate swap, a derivatives contract used to guard against fluctuations in funding costs, was little changed at 7.17 percent, according to data compiled by Bloomberg.

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