Bond Rally Pauses on India Inflation as Rajan Successor Awaited

Updated on
  • July consumer prices surged above central bank’s target range
  • Inflation may remain high in the near term: Edelweiss

Rajan's Departure a Huge Loss for India, Says Bell

The rally in Indian sovereign bonds hit a wall this week as surging inflation weakened the outlook for interest-rate cuts, while investors awaited the naming of a new central bank chief.

Consumer prices jumped 6.07 percent in July from a year earlier, breaching the upper bound of the Reserve Bank of India’s target range, official data showed Aug. 12. Peerless Funds Management Co. and DBS Bank Ltd. are among investors skeptical about further gains in bonds after the benchmark 10-year yield slid last week to its lowest level in seven years. RBI Governor Raghuram Rajan’s term ends on Sept. 4.

“Inflation may remain high in the near term before we see the impact of the above-average monsoon rainfall feed into food prices,” said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. “CPI above the RBI’s tolerance band has faded the prospects of a rate cut in the immediate future.”

The yield on government notes due January 2026 ended little changed from Aug. 12 at 7.10 percent in Mumbai, prices from the central bank’s trading system show. Its close of 7.08 percent on Aug. 11 was the lowest for a benchmark 10-year security since Sept. 2009. The yield dropped four basis points on Friday after cut-offs for some bonds at the government’s weekly debt auction came in below estimates.

To read about the factors that spurred the advance in bonds, click here.

Rajan left the benchmark repurchase rate unchanged at a five-year low of 6.50 percent at his last review on Aug 9. The monetary policy stance remains accommodative, he said, while flagging upside risks to inflation.

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India’s rupee declined 0.4 percent on Friday and was down 0.3 percent for the week at 67.06 per dollar, according to prices from local banks compiled by Bloomberg.