India Bond Yields Rise to 6-Month High as Oil Boosts CPI Concern

Updated on
  • Yields, offshore swap rates are biased higher, HSBC says
  • Excess debt supply, risk of fiscal slippage already weighing

India’s benchmark sovereign bond yields climbed to a six-month high, as rising Brent crude prices added to concern that inflation will accelerate, dampening bets of more interest-rate cuts.

Oil has climbed for four straight weeks, raising worries for bond investors in India, which relies on imports for most of its energy needs. Ten-year notes fell for a third straight month in October, the longest stretch since April 2015, as increasing debt supply, the risk of fiscal slippage and a monetary easing cycle drawing to a close blur the outlook for one of Asia’s most sought-after investment destinations.

“Upward risks to inflation are increasing due to the recent jump in vegetable prices as well as rising crude oil prices,” Himanshu Malik, a strategist at HSBC Holdings Plc in Hong Kong, wrote in a report Monday. Bond yields and offshore swap rates are biased higher, he wrote, also citing the government’s plan to issue special debt to recapitalize state-run lenders.

The yield on the securities due May 2027 jumped four basis points to close at 6.89 percent, the highest close since the debt was first issued in mid-May. It climbed 39 basis points in the last three months. The rupee weakened 0.2 percent on Monday to 64.68 per dollar.

The current spread of about 90 basis points between the 10-year yield and the policy rate is attractive, said Soumyajit Niyogi, associate director at India Ratings and Research Pvt. in Mumbai. He expects yields to peak at these levels.

The Reserve Bank of India’s six-member policy panel left the benchmark repurchase rate unchanged at 6 percent last month, while raising its inflation forecast for the October-March period. Minutes of the Oct. 3-4 meeting released later showed one member said the central bank must be ready to tighten.

Consumer prices rose 3.28 percent in September from a year earlier, matching August’s pace, which was the fastest in five months.

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