Indian 10-Year Bond Decline Pushes Yield to May High on Monsoon

Indian 10-year bonds fell, pushing the yield to an eight-week high, on speculation inadequate rainfall will push up food prices and spur inflation.

The June-September monsoon, which accounts for more than 70 percent of India’s annual precipitation, has been 43 percent lower than the 50-year average since June 1, the weather department said July 11. Finance Minister Arun Jaitley set the government’s gross borrowing target for the year through March 2015 at 6 trillion rupees ($100 billion) in last week’s budget, slightly more than the 5.97 trillion rupees projected by his predecessor Palaniappan Chidambaram in February.

“We are very cautious on the market given the uncertainty on the monsoon front,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “The market is having to absorb constant debt supply at a time when there is a lack of positive triggers.”

The yield on India’s sovereign notes due November 2023 rose one basis point, or 0.01 percentage point, to 8.78 percent in Mumbai, according to the central bank’s trading system. The rate, which rallied 10 basis points last week, is at the highest level since May 20.

Ten-year bonds slumped in June by the most since November as below-average rainfall and higher global oil prices threatened to spur inflation. The weak start to the monsoon has delayed planting of some crops, threatening to push up food costs that account for about half of India’s consumer-price index.

Bonds ended lower today even as official data showed wholesale-price gains slowed more than economists predicted to a four-month low of 5.43 percent in June. The authorities will release data on consumer inflation later today.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, jumped four basis points to 8.45 percent after increasing six basis points last week, data compiled by Bloomberg show.

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