Inflation Surprise Prompts Biggest India Bond Decline in 3 Weeks

  • CPI’s April rise of 5.39% more than 5.05% median in survey
  • 10-year sovereign notes, rupee complete weekly losses

Indian bonds fell, pushing the 10-year yield higher by the most in three weeks, as faster-than-estimated inflation damped the outlook for monetary easing.

Consumer prices rose 5.39 percent in April from a year ago, official data showed after the close of markets on Thursday. That exceeded the median forecast for a 5.05-percent increase in a Bloomberg survey of economists. Reserve Bank of India Governor Raghuram Rajan wants to limit price gains to 5 percent by March 2017 as he looks to the performance of the June-September monsoon rains to determine whether he has room to add to five interest-rate cuts since early 2015.

The yield on sovereign notes due January 2026 rose three basis points, the most since April 21, to 7.45 percent in Mumbai, prices from the RBI’s trading system show. It was up one basis point for the week and has risen as much in May, after sliding 20 basis points in the previous three months.

“The surprise jump in inflation has dashed any hopes of a rate cut at the June 7 policy meeting and that has run down the bond market,” said Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. in New Delhi. “The surge was driven by higher food prices and that makes the monsoon season all the more crucial.”

The consumer food price index climbed 6.32 percent in April after a 5.21 gain in March, led by a 34 percent surge in prices of pulses, Thursday’s government report showed. Investors have been drawing comfort from this year’s forecast for an above-normal monsoon after two successive droughts, as the seasonal showers that account for more than 80 percent of the annual rains can boost farm output and help keep food costs in check.

The inflation rate is “a little higher than we want it to be,” but is “sticky,” Governor Rajan said at a conference in London.

The rupee retreated 0.2 percent to 66.7750 a dollar on Friday, according to prices from local banks compiled by Bloomberg. It dropped 0.3 percent from May 6, capping a second straight weekly decline. The currency has weakened 0.9 percent this year in Asia’s worst performance.

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