India’s 10-Year Bonds Post Third Monthly Drop as Rupee Slides

India’s 10-year government bonds dropped for a third month, the longest run of losses in three years, as the rupee’s plunge to a record stoked concern inflation will accelerate even as economic growth slows.

The currency tumbled 8.1 percent in August in its worst monthly performance since 1992. It touched an unprecedented 68.8450 per dollar on Aug. 28, increasing costs for the nation that imports about 80 percent of its oil needs. Wholesale prices rose 5.79 percent in July, compared with 4.86 percent the previous month, official data show.

The yield on the 7.16 percent notes due May 2023 jumped 43 basis points, or 0.43 percentage point, this month to complete the longest run of losses since August 2010, data compiled by Bloomberg show. The rate climbed to 9.23 percent on Aug. 19, the highest for a benchmark 10-year note since August 2008. It fell 17 basis points in Mumbai today to 8.60 percent, prices from the central bank’s trading system show.

“Sharp weakness in the rupee is starting to weigh on India’s economy, as reflected in the slump in industrial activity and the spike in July WPI inflation,” Standard Chartered Plc analysts including London-based Priyanka Kishore and Singapore-based Nagaraj Kulkarni wrote in a report yesterday. “We expect the Reserve Bank of India to maintain its tight liquidity stance until the rupee stabilizes, keeping short-end interest rates elevated.”

Economic Growth

Standard Chartered sees the benchmark 10-year bond yield at 8.75 percent in the third quarter of 2013 versus a previous forecast of 8 percent, according to the report. The yield on the 2023 bonds rallied 73 basis points in July after advancing 20 basis points in June, data compiled by Bloomberg show.

Growth in Asia’s third-largest economy slowed to 4.4 percent in the quarter ended June 30, a government report showed today after close of trading. That’s the slowest pace since 2009 and short of the median 4.7 percent forecast by economists in a Bloomberg survey.

The rupee jumped 1.4 percent to 65.7050 per dollar today. The currency has dropped for three straight weeks after a series of measures by policy makers since mid-July failed to stem its slide. The RBI raised two interest rates and tightened the supply of cash in the banking system in July. A surge in yields after the cash squeeze prompted the RBI to announce a plan to buy long-dated debt.

The central bank bought bonds worth 62.3 billion rupees at an open-market auction today. Primary dealers bought 18.2 billion rupees of the 170 billion rupees of government securities sold today, the RBI said in an e-mailed statement.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, slid 19 basis points to 9.58 percent, data compiled by Bloomberg show.

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