Inflation Shock Hits Indian Bonds After Biggest Drop Since April

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  • Consumer prices rose a higher-than-estimated 5.76% in May
  • Ten-year sovereign notes fell the most in seven weeks Monday

Indian bonds are set for more losses after dropping the most since April on Monday, as the fastest inflation in 21 months dents the outlook for monetary easing, according to IDFC Asset Management Co. and FirstRand Ltd.

Consumer prices rose 5.76 percent in May from a year ago, the most since August 2014, official data showed after the close of markets on Monday. The yield on benchmark 10-year notes, which jumped to a three-month high of 7.53 percent ahead of the inflation report, will climb to as high as 7.60 percent in the coming weeks, according to IDFC Asset and FirstRand. The May CPI reading was “a shocker,” Jay Shankar, an economist at Religare Securities Ltd. in New Delhi, wrote in a note.

“With inflation unlikely to ease significantly, there could be an upward bias to bond yields given that we are broadly done with the rate-easing cycle,” said Suyash Choudhary, Mumbai-based head of fixed income at IDFC Asset that oversees about 523 billion rupees ($7.8 billion). “It’s not a very comfortable situation.”

Inflation accelerated for a second month in May and exceeded the median forecast of 5.60 percent in a Bloomberg survey. Reserve Bank of India Governor Raghuram Rajan, who wants to limit price gains to 5 percent by March 2017, left benchmark borrowing costs unchanged at a five-year low last week, while saying that the “surprise” inflation pick-up in April made “the future trajectory of inflation somewhat more uncertain.” A looming pay rise for government employees and rising oil costs have exacerbated matters.

WPI Inflation

Wholesale prices increased 0.79 percent in May from a year ago, the fastest pace since October 2014, a separate government report showed Tuesday.

The yield on bonds due January 2026 fell one basis point to 7.52 percent in Mumbai, prices from the central bank’s trading system show. It rose three basis points on Monday, the most since April 21, to close at the highest level since March 16.

The rupee dropped for a fourth day, slipping 0.2 percent to 67.2650 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It declined 0.6 percent on Monday, the most in more than three weeks.