India's Rate Swaps Climb to Five-Week High as Easing Bets Recede

  • Investors concerned about fiscal slippage, rates: Edelweiss
  • Ten-year bond yields rose in six of the past seven days

India’s one-year interest-rate swaps climbed to the highest in more than five weeks on speculation higher government spending will spur inflation and reduce scope for interest-rate cuts.

Investors are concerned that a proposed increase in salaries for millions of civil servants and demands for more rural support will derail Prime Minister Narendra Modi’s fiscal consolidation plans. Central bank Governor Raghuram Rajan kept interest rates unchanged this month and said he’d watch inflation and the annual budget on Feb. 29 before adding to last year’s four rate reductions. Consumer inflation accelerated to a 17-month high in January.

“Fears of fiscal slippage are weighing on the minds of investors,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “A higher budget deficit will put upward pressure on inflation and lead to a longer pause on interest rates.”

The cost to lock in borrowing costs for a year rose three basis points to 7.01 percent in Mumbai, the highest since Jan. 15, data compiled by Bloomberg show. The yield on sovereign bonds due January 2026 climbed five basis points to 7.82 percent after rising four basis points on Monday, according to prices from the Reserve Bank of India’s trading system. It has jumped 24 basis points since the debt was issued in early January.

Modi’s government will raise its deficit target for the year starting April 1 to 3.7 percent of gross domestic product from 3.5 percent projected earlier, according to predictions from Standard Chartered Plc and Nomura Holdings Inc.

The rupee ended little changed at 68.5875 a dollar, prices from local banks compiled by Bloomberg show. It declined to as low as 68.6925 on Monday, near a record 68.845 seen in August 2013. The currency has weakened 3.6 percent this year in Asia’s worst performance after the South Korean won.

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