Indian 2022 Bond Yield Climbs for Third Day on Inflation Concern

The yield on India’s government bonds due 2022 climbed for a third day as the rupee approached a record low, spurring concern inflation will accelerate and reduce the scope for the central bank to cut borrowing costs.

The rupee weakened to within 0.9 percent of the all-time low of 60.765 per dollar reached on June 26, raising the cost of imported goods. Reserve Bank of India Governor Duvvuri Subbarao cited inflation risks when he kept the repurchase rate at 7.25 percent last month. The pace of consumer-price gains in India has stayed close to 10 percent, rising 9.31 percent in May from a year earlier, even as wholesale-price inflation, which is more frequently used for policy decisions, touched a 43-month low of 4.7 percent.

The yield on the 8.15 percent notes jumped four basis points, or 0.04 percentage point, to 7.69 percent in Mumbai, according to the central bank’s trading system. The rate climbed 18 basis points last month, the most since the securities were issued in June 2012.

“The rate action is dependent on the rupee, which is why the bond markets are closely tracking the currency’s movement,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai.

The rupee slid 0.9 percent to 60.2200 per dollar today, taking its loss this week to 1.4 percent. It plunged 8.6 percent in the second quarter, the most since 2011. A sustained 10 percent drop in the rupee adds 150 basis points to 200 basis points to wholesale-price inflation, according to a research note released last month by Standard Chartered Plc.

International investors pulled more than $5 billion from local debt in June, exchange data show. India’s 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 policy statement on June 17.

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the RBI said. The next review is on July 30.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points to 7.56 percent, data compiled by Bloomberg show.

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