India 10-Year Bonds Slump Most in Six Weeks as Rupee Plummets

India’s 10-year government bonds dropped, with the yield surging the most in six weeks, as the rupee’s biggest plunge since 1996 fueled concern that inflation will accelerate.

The currency sank 2.9 percent today to an unprecedented 66.19 per dollar, a record low, taking its loss this quarter to more than 10 percent. A weaker currency stokes inflation as India imports about 80 percent of its oil needs. Wholesale prices rose 5.79 percent in July from a year earlier, compared with 4.86 percent the previous month, official data show.

The yield on the 7.16 percent bonds due May 2023 jumped 52 basis points, or 0.52 percentage point, to 8.86 percent in Mumbai, prices from the central bank’s trading system show. That’s the biggest jump for a benchmark 10-year note since July 16, according to data compiled by Bloomberg. The rate has climbed 141 basis points since the end of June, touching a 12-year high of 9.48 percent on Aug. 20.

“There is continued pressure on the currency, which is causing problems on the inflation front,” said Pradeep Madhav, the Mumbai-based managing director of STCI Primary Dealer Ltd. “The overall scenario looks pretty bleak.”

The rupee completed a second week of losses on Aug. 23 after a series of measures by policy makers since mid-July failed to stem its slide. The Reserve Bank of India raised two interest rates and tightened the supply of cash in the banking system in July. A spike in yields after the cash squeeze prompted the RBI to announce a plan to buy long-dated debt.

Strategy Shift

“While the RBI’s shift in strategy last week could have marked a bottom for the bond market, we don’t expect a sharp rally from current levels and look for 10-year yields to be range-bound in the near term,” Rohit Arora, a Singapore-based fixed-income strategist at Barclays Plc, wrote in a report released yesterday.

Primary dealers bought 5.32 billion rupees of the 10 billion rupees of inflation-indexed notes auctioned today, according to a statement from the RBI. India will sell 170 billion rupees ($2.5 billion) of bonds maturing between 2019 and 2041 on Aug. 30.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, climbed 28 basis points to 9.80 percent, data compiled by Bloomberg show.

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