India 2022 Bond Yield at Six-Week High on Interest-Rate Outlook

India’s government bonds fell, pushing the yield on the 2022 notes to a more than six-week high, on speculation the rupee’s plunge to a record low reduces the chance the central bank will cut borrowing costs.

The Indian currency posted its biggest loss since September 2011 last week and touched an unprecedented 59.98 per dollar on June 20 as the U.S. signaled it is prepared to phase out a stimulus program that spurred fund flows to emerging markets. A weaker rupee raises the cost of imports including oil. The Reserve Bank of India held its repurchase rate at 7.25 percent on June 17, after cutting in the previous three reviews, citing inflation risks.

“The sharp fall in the rupee will exert pressure on inflation and is also likely to deteriorate the already high current-account deficit,” said Prasanna Patankar, the Mumbai-based head of treasury at Securities Trading Corp. of India Ltd. “The RBI maintained in its policy review that it is only a durable receding of inflation that will open up the space for monetary policy.”

The yield on the 8.15 percent bonds due June 2022 rose eight basis points, or 0.08 percentage point, to 7.70 percent in Mumbai, according to the central bank’s trading system. That’s the highest level since May 8.

The monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the central bank said in its statement on June 17, adding it stands ready to “respond rapidly and appropriately to any adverse developments.”

The rupee weakened further today, dropping 0.7 percent to 59.6750 per dollar, according to prices from local banks compiled by Bloomberg. The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, jumped five basis points to 7.48 percent, data compiled by Bloomberg show.

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