Indian Bonds Post First Weekly Loss in 2014 on Rates Concern

India’s 10-year bonds posted the year’s first weekly loss after a central bank panel recommended the nation’s monetary policy focus on curbing consumer prices, a shift that could lead to higher borrowing costs.

The committee appointed by Reserve Bank of India Governor Raghuram Rajan proposed adopting a CPI target of 4 percent by 2016, moving away from the current practice of using wholesale prices as the benchmark for living costs, according to a Jan. 21 report. India’s consumer-price inflation has been faster, averaging 9.3 percent in 2013 versus WPI gains of 6.3 percent, and may add pressure on the RBI to tighten policy.

“If the recommendations of this report are accepted with the increased focus on CPI over WPI, we expect the RBI to maintain its anti-inflationary stance over a prolonged period of time and don’t rule out further rate hikes,” Upasna Bhardwaj, an economist in Mumbai at ING Vysya Bank Ltd., wrote in a note dated yesterday. “The continued focus on inflation is likely to weigh on the bond markets.”

The yield on the 8.83 percent notes due November 2023 climbed 11 basis points, or 0.11 percentage point, this week to 8.74 percent in Mumbai, according to the central bank’s trading system. It jumped seven basis points today.

Focusing on consumer prices would bring the RBI’s approach closer to that of central banks from emerging economies such as Indonesia, and advanced nations. India should aim to reduce CPI to 8 percent within one year and to 6 percent by 2016, at which point the 4 percent target would be formally adopted, the panel led by Deputy Governor Urjit Patel said.

Interest Rates

Governor Rajan raised borrowing costs twice since mid-September to counter inflation before leaving the repurchase rate at 7.75 percent at the last meeting on Dec. 18.

“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 Jan. 22 report, adding that they expect the RBI to increase the repo rate by 25 basis points at the next review on Jan. 28.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, increased eight basis points this week and five basis points today to 8.41 percent, the highest since Jan. 9, data compiled by Bloomberg show.

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