India’s Bonds Decline as Inflation Tops Economists’ Predictions

India’s bonds dropped after a report showed inflation accelerated last month by more than economists predicted. The rupee pared earlier gains.

Wholesale prices rose 7 percent in October from a year earlier, the fastest pace since February and more than the median estimate in a Bloomberg survey for a 6.95 percent increase, official data showed today. September’s rate was revised to 6.99 percent from 6.1 percent. Reserve Bank of India Governor Raghuram Rajan said yesterday he’d look at data before deciding whether to raise the benchmark repurchase rate for a third consecutive meeting.

“The inflation data is quite a large negative,” said Vikas Babu, a currency trader at Andhra Bank in Mumbai. “The revision is what’s spooking the market.”

The yield on the 7.16 percent bonds due May 2023 climbed 10 basis points, or 0.10 percentage point, to 9.02 percent in Mumbai, prices from the central bank’s trading system show. The rate had dropped to as low as 8.88 percent earlier. The rupee rose 0.3 percent to 63.12 per dollar, after rising as much as 0.6 percent earlier, according to prices from local banks compiled by Bloomberg.

The rupee rebounded yesterday from a two-month low and 10-year sovereign bond yields dropped from the highest level in 12 weeks after Rajan predicted the current-account deficit will narrow from a record and said the monetary authority will supply adequate cash to the financial system.

Current Account

The shortfall in the broadest measure of trade will fall to around $56 billion in the year through March 2014 from $88 billion in the previous 12 months, Rajan said at the unscheduled press conference yesterday. He also announced the purchase of 80 billion rupees ($1.3 billion) of bonds set for Nov. 18, after the government auctioned 150 billion rupees of debt maturing in 2020, 2027, 2030 and 2041 today.

“Rajan seems to be uncomfortable with yields above 9 percent,” said Debendra Kumar Dash, a trader at Development Credit Bank Ltd. in Mumbai. The debt-purchase announcement “was a positive for the market,” he said.

The 10-year bond yield rose three basis points from Nov. 8 and reached 9.15 percent yesterday, the highest since Aug. 19. The rupee fell 1 percent for the week. Indian financial markets are shut tomorrow for a local holiday.

Consumer price-inflation accelerated to 10.09 percent last month from 9.84 percent and industrial production increased 2 percent in September, official reports showed Nov. 12. A Bloomberg survey had predicted a 3.5 percent rise in factory output.

Volatility, Forwards

“We believe the weak economy, increases in food supply, and recent policy rate hikes will provide a disinflationary impetus over time, and recent data do not dispel this view,” Rajan said yesterday. “We will watch the incoming data carefully, especially looking for the effects of the harvest on food prices as well as the second-round effects of fuel-price increases and exchange-rate depreciation, before we make further decisions on interest rates.”

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell 103 basis points to 12.62 percent.

Three-month onshore rupee forwards rose 0.4 percent to 64.55 per dollar, data compiled by Bloomberg show. Offshore non-deliverable contracts advanced 0.4 percent to 65.15. 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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