India 10-Year Yield at One-Week High on RBI Concern; Rupee Drops

India’s 10-year bonds fell, pushing the yield to a one-week high, on concern the central bank will resume raising interest rates should inflation persist. The rupee snapped a three-day advance.

Reserve Bank of India Governor Raghuram Rajan left the benchmark repurchase rate at 7.75 percent on Dec. 18, saying it “will act, including on off-policy dates if warranted, so that inflation expectations stabilize.” The move, which came after official data showed wholesale prices climbed 7.52 percent in November from a year earlier, the fastest since September 2012, was predicted by only five of 31 analysts surveyed by Bloomberg.

“There isn’t much optimism in the bond market given concerns about high inflation and the possibility of further rate increases,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai. “The markets, even on the currency side, are witnessing low volumes and we may see wide swings, but trade overall will be range-bound.”

The 8.83 percent sovereign notes due November 2023 fell for a fourth day, with the yield rising two basis points, or 0.02 percentage point, from Dec. 24 to 8.89 percent in Mumbai, according to the central bank’s trading system. That’s the highest level since Dec. 17. The markets were shut yesterday for the Christmas holiday.

The rupee lost 0.6 percent to 62.165 per dollar, according to prices from local banks compiled by Bloomberg. The currency has dropped 11.6 percent this year, headed for a third straight annual loss.

Close Call

Clarity is needed on data before taking further rate action, and nobody should doubt the RBI’s desire to fight price increases, Rajan said in an interview broadcast on the ET Now television channel on Dec. 23. He boosted the repo rate by 25 basis points in each of the two previous reviews since taking office Sept. 4.

India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, was unchanged at 8.50 percent, data compiled by Bloomberg show.

The decision to hold rates was “a close one,” the central bank said in its policy statement on Dec. 18. Consumer prices climbed 11.24 percent in November, the fastest in data compiled by Bloomberg going back to January 2012.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, slid 16 basis points from Dec. 24 to 10.49 percent.

Three-month offshore non-deliverable forwards were at 63.37 per dollar, compared with 63.13 on Dec. 24, data compiled by Bloomberg show. 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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