Indian Bonds Complete Weekly Loss on Rate Concern; Rupee Gains

India’s 10-year bonds posted their worst weekly loss in seven on concern the central bank will raise interest rates unless inflation eases. The rupee gained.

The Reserve Bank of India left the benchmark repurchase rate at 7.75 percent on Dec. 18, a move predicted by only five of 31 economists surveyed by Bloomberg. It said it “will act, including on off-policy dates if warranted, so that inflation expectations stabilize.” The others in the survey had forecast an increase to 8 percent. The RBI held rates even as official data showed wholesale prices climbed 7.52 percent in November from a year earlier, the fastest since September 2012.

“Losses in the bond market are attributable to concerns about inflation and interest rates,” said Anoop Verma, vice president for treasury at Development Credit Bank Ltd. in Mumbai. “The tide should turn as we see the notes finding some support around a yield level of 8.90 percent.”

The yield on the 8.83 percent sovereign notes due November 2023 climbed 16 basis points, or 0.16 percentage point, this week and seven basis points today to 8.96 percent in Mumbai, according to the central bank’s trading system. That’s the worst week for benchmark 10-year debt since the period ended Nov. 8, data compiled by Bloomberg show.

Dollar Weakness

The rupee rose 0.3 percent this week to 61.8450 per dollar, according to prices from local banks compiled by Bloomberg. The currency, which jumped 0.5 percent today, has strengthened on speculation inflows to the nation’s stock market outpaced dollar purchases by local importers. Global funds have poured $2.4 billion into local shares this month.

“Custodians are selling dollars plus there has been some dollar weakness we’ve seen globally today,” said Vikas Babu, a trader at Andhra Bank in Mumbai.

The rupee has lost 11.1 percent in 2013, on course for a third straight annual drop.

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.

Clarity is needed on data before taking further rate action, and nobody should doubt the RBI’s desire to fight price increases, Governor Raghuram 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.

Funds Return

Global funds are returning to Indian bonds after an unprecedented $14 billion sell-off as the RBI’s steps to stabilize the rupee and tame inflation revive confidence even as the U.S. prepares to cut stimulus. International investors raised holdings of rupee debt by $932 million this month to about $25 billion, exchange data show, after reducing them in each of the last six months.

Bonds extended losses today after results of an auction conducted by the RBI showed India sold 70 billion rupees ($1.1 billion) of debt maturing 2023 at a cut-off yield of 8.9341 percent.

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, slumped 31 basis points this week and nine basis points today to 10.40 percent.

Three-month offshore non-deliverable forwards rose 0.3 percent for the week and today to 63.19 per dollar, 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.

India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, rose seven basis points this week to 8.50 percent, data compiled by Bloomberg show. The rate was unchanged today.

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