Indian Bonds, Rupee Head for Weekly Loss After RBI Rate Increase

India’s 10-year government bonds and the rupee headed for a third weekly loss as the central bank increased borrowing costs for the second time in less than two months to rein in inflation.

Reserve Bank of India Governor Raghuram Rajan, who has said containing inflation is his top priority, raised the key repurchase rate by 25 basis points to 7.75 percent on Oct. 29. This came after data showed wholesale prices rose 6.46 percent in September, the most in seven months, while consumer-price gains accelerated to 9.84 percent. The RBI will today auction debt maturing between 2020 and 2041.

The yield on the 7.16 percent government notes due May 2023 climbed six basis points, or 0.06 percentage point, this week to 8.64 percent as of 10:15 a.m. in Mumbai, prices from the RBI’s trading system show. The rate rose one basis point today.

The rupee weakened 0.7 percent from Oct. 25 and 0.6 percent today to 61.8937 per dollar, according to prices from local banks compiled by Bloomberg.

“Inflation concerns do remain in the market,” said Paresh Nayar, head of money-market and currency trading at FirtRand Ltd. in Mumbai. “I’d expect the 10-year yield to trade between 8.40 percent and 8.80 percent until December.”

The RBI expects WPI inflation to remain higher than current levels during most of the rest of the fiscal year through March, with consumer prices staying around or above 9 percent, it said Oct. 29. The central bank also cut its economic growth forecast for the year to 5 percent from 5.5 percent.

Rate Swaps

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose two basis points this week to 8.41 percent, data compiled by Bloomberg show. It was little changed today.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, dropped 142 basis points, or 1.42 percentage points, this week to 10.25 percent. It jumped 66 basis points today.

Three-month onshore rupee forwards fell 0.7 percent today to 63.23 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts declined 0.7 percent to 63.41. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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