Oil Dents Inflation Optimism as India Bond Yield at 3-Week High

  • Brent crude prices have climbed almost 16 percent this month
  • Rupee declines 0.3 percent after rising for two days

Indian bonds fell, driving the 10-year yield to a three-week high, as rising oil prices dented optimism spurred by the smallest inflation reading in six months.

Brent crude climbed for a third day, taking its rally this month to almost 16 percent and raising import costs for the South Asian nation that buys three quarters of its oil from abroad. Gains in consumer prices slowed to 4.83 percent in March, official data showed last week. The Reserve Bank of India wants to limit inflation to 5 percent by March 2017.

The yield on sovereign notes due January 2026 rose four basis points to 7.47 percent in Mumbai, its highest close since March 30, according to prices from the central bank’s trading system. The yield, which increased two basis points on Wednesday, was at 7.41 percent on April 4, the lowest for a 10-year benchmark security since June 2013.

“We are witnessing a selloff in bonds on account of the rebound in oil prices,” said Abhay Garg, vice president for fixed income at PNB Gilts Ltd. in New Delhi. “If energy prices keep moving up, they will have a bearing on inflation and the trade deficit.”

India’s trade shortfall shrank to a five-year low in March, with oil imports plunging 35.3 percent year-on-year to $4.8 billion, government data showed this week. Sovereign bonds have rallied as slower inflation and the government’s budget decision to stick to fiscal goals prompted the RBI to lower interest rates this month for a fifth time since early 2015. The benchmark 10-year yield slumped 16 basis points last month in the debt’s best March performance since 1999.

The rupee weakened 0.3 percent to 66.3950 a dollar, according to prices from local banks compiled by Bloomberg. It climbed 0.5 percent on Wednesday, the most since March 17.

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