Indian Bond Yields Climb to a Two-Week High as Rupee Weakens

India’s 10-year bonds fell, with the yield climbing to a more than two-week high, as the rupee slumped to its lowest level since November on concern a sell-off in emerging-market assets will worsen.

The currency dropped 0.7 percent to 63.10 per dollar amid concerns an economic slowdown in China and reduced monetary stimulus from the U.S Federal Reserve will cut capital flows to high-yielding markets. A weaker rupee stokes inflation as India imports about 80 percent of its oil. The Reserve Bank of India will leave its benchmark repurchase rate at 7.75 percent at a meeting tomorrow, according to 42 of 45 economists surveyed by Bloomberg. Three predict an increase to 8 percent.

“Bond markets tracked weakness in the rupee, plus there is some nervousness on account of the global sell-off,” Anoop Verma, vice president for treasury at DCB Bank Ltd. in Mumbai, said by phone.

The yield on the 8.83 percent sovereign notes due November 2023 rose three basis points, or 0.03 percentage point, to 8.77 percent in Mumbai, according to the central bank’s trading system. That’s the highest level since Jan. 9. The yield jumped from an intraday low of 8.7 percent as the rupee extended declines.

Governor Raghuram Rajan left rates unaltered at the RBI’s last meeting on Dec. 18, saying the central bank is awaiting more data. He raised the repo rate by 25 basis points each in September and October to counter inflation.

Data this month showed wholesale-price gains eased to 6.16 percent in December from a year earlier, compared with a 14-month high of 7.52 percent in November. Consumer prices rose 9.87 percent, the slowest pace in three months.

“The RBI will maintain status quo on rates tomorrow and the only positive trigger for bond markets could be some liquidity-easing measures,” Verma said.

Panel Report

Ten-year bonds completed this year’s first weekly loss on Jan. 24, with yields climbing 11 basis points in the period, after a central bank panel recommended that monetary policy should focus on curbing consumer prices, a shift that could lead to higher borrowing costs.

The panel appointed by 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. India’s consumer-price inflation has averaged around 10 percent in 2013 compared with WPI’s 6.3 percent.

“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. Nomura expects the RBI to increase the repo rate by 25 basis points tomorrow.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, increased seven basis points to 8.48 percent today, the highest level since Dec. 30, data compiled by Bloomberg show.

Before it's here, it's on the Bloomberg Terminal.