Indian Bonds Decline as Quickening Inflation Curbs Rate-Cut Bets

  • Consumer prices rise in January at fastest pace in 17 months
  • RBI has no room to cut rates in 2016: Capital Economics

Indian sovereign bonds fell, driving the yield on notes due 2026 to the highest since they were issued in early January, on speculation faster inflation will curb the central bank’s room to lower interest rates.

Consumer prices rose 5.69 percent in January from a year earlier, the most in 17 months and exceeding the 5.4 percent median estimate in a Bloomberg survey, official data showed on Friday. The acceleration comes as Reserve Bank of India Governor Raghuram Rajan awaits the government’s Feb. 29 annual budget to decide whether to add to last year’s four rate cuts. Concern that a proposed increase in salaries of millions of civil servants will spur consumption and raise living costs has weighed on bonds.

“The window for further easing following the cumulative 125 basis points of rate cuts over the past 12 months has now shut,” Shilan Shah, India economist at Capital Economics Ltd. in Singapore, wrote in a report dated Feb. 12. While the RBI has succeeded in limiting inflation to its 6 percent goal for January, meeting the medium-term targets “will prove to be an altogether tougher challenge,” he wrote.

The yield on notes due January 2026 climbed three basis points, the most since Feb. 2, to 7.75 percent in Mumbai, prices from the RBI’s trading system show.

While inflation is expected to be around the RBI’s goal of 5 percent by end-March 2017, planned pay increases for civil servants “will impart upward momentum to this trajectory for a period of one to two years,” the RBI said in a statement on Feb. 2, when it kept benchmark borrowing costs unchanged.

The rupee rose 0.3 percent, the most since Feb. 4, to 68.06 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It fell to as low as 68.4725 on Friday, near a record 68.845 seen in August 2013. A certain amount of depreciation in the currency is necessary to ensure India doesn’t become uncompetitive, Rajan said over the weekend.

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