Indian Bonds Post Monthly Drop on Inflation as Rupee Retreats

India’s 10-year sovereign bonds completed their worst month since September 2013 on concern rising oil prices and the prospect of inadequate rains will reignite inflation and limit the central bank’s room to cut interest rates.

Brent crude has surged about 20 percent in April, the biggest advance since May 2009, amid speculation a shale boom that’s contributed to a record U.S. supply glut is ending. India imports about 80 percent of its oil. The nation’s weather department has forecast a below normal June-September monsoon season, which could hurt farm output and stoke food prices. The rupee posted its worst month in 2015.

“Uncertainty over the monsoon and the rise in oil prices are weighing on investor sentiment,” said Vijayan Subramani, head of India treasury & markets at DBS Bank Ltd. in Mumbai. “There isn’t anything exciting to make a further commitment to the bond market.”

The yield on the notes due July 2024 climbed 12 basis points, or 0.12 percentage point, this month, to 7.86 percent in Mumbai, prices from the central bank’s trading system show. That’s the biggest increase for benchmark 10-year debt since September 2013. The rate, which rose five basis point today, is at its highest level since Jan. 8.

The Reserve Bank of India will consider factors including the “likely strength” of monsoon rains before deciding on future actions, Governor Raghuram Rajan said in the latest policy statement on April 7, when he left the benchmark repurchase rate at 7.50 percent. The central bank may not cut rates at its next review on June 2, DBS Bank’s Subramani said.

Risks to the RBI’s inflation target are “beginning to tilt more decisively to the upside,” BNP Paribas SA wrote in a note Wednesday, citing the oil and monsoon factors. Bond and currency markets are shut Friday and on May 4 for public holidays.

Rupee Declines

The rupee has weakened 1.5 percent in April in Asia’s worst performance as data showed India’s trade deficit widened last month amid a slump in exports. The currency, which fell 0.2 percent on Thursday to 63.4225 a dollar, completed its biggest monthly loss since December, according to prices from local banks compiled by Bloomberg.

The trade shortfall widened to a four-month high of $11.8 billion in March as exports sank 21 percent from a year earlier in the biggest drop since 2009, government data showed April 17.

The rupee “needs to weaken to 64 or maybe 65” a dollar this year, Ashima Goyal, a member of the central bank’s technical advisory panel that makes policy recommendations to Governor Rajan, said in a phone interview this month.

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