India’s 10-Year Bonds Decline After Central Bank Rate Increase

India’s 10-year government bonds fell after the central bank raised its benchmark rate and said inflation is set to quicken.

Reserve Bank of India Governor Raghuram Rajan boosted the repurchase rate by 25 basis points to 7.75 percent yesterday, as predicted by 32 of 42 analysts surveyed by Bloomberg. That was the second increase in two months. India’s wholesale prices rose 6.46 percent in September, the most in seven months, while consumer-price gains accelerated to 9.84 percent. The RBI said it expects wholesale-price inflation to remain higher than current levels through most of the remainder of the fiscal year ending March 31.

“The RBI remains cautious on the price situation as the inflation uptick of recent months remains beyond its comfort zone,” Barclays Plc analysts including Mumbai-based Siddhartha Sanyal wrote in a report dated yesterday.

The yield on the 7.16 percent notes due May 2023 jumped four basis points, or 0.04 percentage point, to 8.57 percent in Mumbai after falling 12 basis points yesterday, the biggest drop in three weeks, according to prices from the central bank’s trading system.

Along with the repo-rate increase, the RBI took steps to ease cash supply in the financial system to support the economy. The authority cut the marginal standing facility rate, charged on cash loans to banks, to 8.75 percent from 9 percent and raised lenders’ borrowing limits using term repurchase contracts. Pramerica Asset Managers Pvt. and Crisil Ltd., the local unit of Standard & Poor’s, expect the central bank to raise the repo rate to 8 percent at its next review on Dec. 18.

Inflation Risk

“It is important to break the spiral of rising price pressures in order to curb the erosion of financial savings and strengthen the foundations of growth,” RBI’s Rajan said in yesterday’s statement. The policy stance seeks to manage inflation expectations amid weak economic expansion, and the central bank will “closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.

The RBI cut its economic growth forecast for the year to 5 percent from 5.5 percent.

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, was unchanged at 8.40 percent at close after rising two basis points intraday, data compiled by Bloomberg show.

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