Indian Bonds Jump as Falling Oil Prices Calm Inflation Concern

India’s 10-year sovereign bonds advanced, with the yield declining the most in almost three weeks, as a drop in oil prices eased concern that inflation will quicken.

Brent crude traded near its lowest in a week amid speculation that Iraqi oil production won’t be disrupted by escalating violence in OPEC’s second-largest producer. Prices climbed in each of the past two weeks, raising inflation worries for India, which imports about 80 percent of its oil. The nation is also faced with the prospect of a weaker monsoon hurting farm output and driving up food costs.

The yield on the 8.83 percent bonds due November 2023 slid six basis points, or 0.06 percentage point, to 8.72 percent in Mumbai, the most since June 5, according to prices from the central bank’s trading system. The rate, which jumped 13 basis points last week, was at its highest since May 20 yesterday.

“The decline in Brent crude prices has led to some improvement in market sentiment,” Sujoy Kumar Das, head of fixed income at Religare Invesco Asset Management Co. in Mumbai, said by phone. Markets have to cope with near-term uncertainties related to the budget and inflation, he said.

India’s new government will present the federal budget on July 10, an official said in New Delhi yesterday, asking not to be identified citing rules. The administration on June 20 said railway passenger and freight charges will rise by 14.2 percent and 6.5 percent, respectively, from tomorrow.

Monsoon Shortfall

The monsoon, which accounts for more than 70 percent of India’s annual rainfall, has been 37 percent lower than the 50-year average since June 1, the weather department said on its website yesterday.

“A combination of poor monsoons, sustained high crude prices and administered price hikes poses a risk of 50 basis points to 80 basis points to our 8 percent FY15 CPI estimate,” Citigroup Inc. economists Rohini Malkani and Anurag Jha wrote in a note yesterday. Consumer prices in India increased 8.28 percent in May from a year earlier, the slowest pace in three months.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell two basis points to 8.38 percent, data compiled by Bloomberg show. They climbed 10 basis points last week.

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