India’s 10-Year Bonds Drop for a Third Day on Inflation Concerns

India’s 10-year government bonds dropped for a third day, reversing early gains, on concern the rupee’s weakness will keep inflation elevated and force the central bank to further increase borrowing costs.

The Indian currency, which fell in each of the last three days, pared an intraday gain of as much as 0.9 percent to close 0.1 percent higher at 61.59 per dollar today. Wholesale prices rose 6.46 percent in September, the most in seven months, while consumer-price gains quickened to 9.84 percent, official data showed Oct. 14. Reserve Bank of India Governor Raghuram Rajan, who raised the benchmark repurchase rate by 25 basis points to 7.5 percent last month in the first increase since 2011, reviews policy on Oct. 29.

“The rupee’s movement isn’t giving any comfort to the bond markets,” said Debendra Kumar Dash, a Mumbai-based fixed-income trader at Development Credit Bank Ltd. “Investors expect a 25-basis point increase in the repo rate next week.”

The yield on the 7.16 percent notes due May 2023 rose three basis points, or 0.03 percentage point, to 8.63 percent in Mumbai, a one-week high, according to prices from the central bank’s trading system. The rate fell as low as 8.54 percent earlier as U.S. jobs data added to speculation the Federal Reserve will delay tapering its monetary stimulus that has buoyed emerging-market assets.

The rupee has declined 0.8 percent since reaching a two-month high on Oct. 11. A weaker currency stokes inflation as India imports about 80 percent of its oil needs. Increased price pressures will prompt the RBI to raise the benchmark rate by 50 basis points on Oct. 29, Taimur Baig, Singapore-based director of Asia economics at Deutsche Bank AG, wrote in an Oct. 16 report.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 8.43 percent, data compiled by Bloomberg show.

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