India’s Bond Yields Jump Most This Month After RBI Panel Report

India’s 10-year government bonds fell, pushing the yield up by the most this month, after a central bank panel proposed focusing on consumer-price inflation in a shift that could lead to higher interest rates.

A committee appointed by Reserve Bank of India Governor Raghuram Rajan recommended adopting a CPI target of 4 percent by 2016 as part of a sweeping monetary policy overhaul. An independent panel should set benchmark interest rates, the committee said in a report yesterday. The RBI, which uses wholesale-price inflation as the main cost-of-living measure to guide policy, is scheduled to meet next on Jan. 28.

The yield on the 8.83 percent sovereign bonds due November 2023 jumped six basis points, or 0.06 percentage point, to 8.61 percent in Mumbai, according to the central bank’s trading system. That’s the most since Dec. 27.

“The key implication of this new CPI-based inflation targeting framework is that interest rates in India will remain higher for longer,” Sonal Varma and Aman Mohunta, Mumbai-based economists at Nomura Holdings Inc., wrote in a report today. “Against this backdrop, we stick to our call of a cumulative 50-basis-point hike in the repurchase rate in the first half of 2014, including a 25-basis-point hike” next week, they wrote.

Focusing on consumer prices would bring the RBI’s approach closer to that of other central banks from Indonesia and Europe to the U.S. The Indian monetary authority’s rate policy should aim to reduce CPI to 8 percent within one year and 6 percent by 2016, at which point the 4 percent target would be formally adopted, the panel led by Deputy Governor Urjit Patel said.

Inflation, Rates

Gains in wholesale prices slowed to 6.16 percent in December from a year earlier, official data showed last week, compared with a 14-month high of 7.52 percent in November. Consumer prices rose 9.87 percent, the least in three months, a separate report showed. Rajan raised borrowing costs twice since mid-September to curb inflation before leaving the repurchase rate at 7.75 percent at the last meeting on Dec. 18.

Bonds due in a decade dropped for the second day today after the yield on the notes slumped to 8.52 percent on Jan. 20, the lowest level for benchmark 10-year debt since Oct. 11, on optimism slowing inflation will ease pressure on the RBI to raise interest rates next week.

The government didn’t sell any debt last week and the central bank took steps to boost cash supply in the banking system, aiding the rally. The RBI purchased 94.77 billion rupees ($1.5 billion) of notes in open-market operations today.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, surged 16 basis points to 8.35 percent, the biggest jump since Aug. 28, data compiled by Bloomberg show.

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