India’s 10-year bond yields may rise to a six-year high by the end of May after the central bank last week quashed speculation it is finished raising interest rates, ICICI Securities Ltd said.
The Reserve Bank of India, battling inflation near the highest in more than two years, unexpectedly raised its key overnight lending rate for the second time this year on 30 March and increased the amount of cash lenders must set aside to cover deposits.
Ten-year bonds have dropped for four months, pushing up borrowing costs in a nation where government debt is forecast to have reached 60% of gross domestic product in FY07.
“It is a clear signal that they haven’t yet done with the interest-rate increases,” which will be negative for bonds, said A. Prasanna, a fixed-income strategist at ICICI Securities, a Mumbai-based primary dealer that underwrites government debt sales. “They are worried about inflation, growth in loans and excess liquidity.”
The yield on the benchmark 10-year bond may climb to 8.5% in two months, the most since September 2001, Prasanna said. The yield on the 8.07% note due January 2017 rose 3 basis points, or 0.03 percentage point, to 8% on 30 March, according to RBI. The price fell 0.23, or 23 paise per 100-rupee face amount to 100.42. India’s bond and currency markets were closed on Monday for book-keeping.
Indian bonds have handed investors a loss of 0.14% this year, the second-worst performers in Asia after the Philippines, according to indexes of 10 regional local-currency markets compiled by HSBC Holdings Plc. The yield on India’s benchmark 10-year note rose 39 basis points last quarter, the biggest increase since June 2006.
“The sustained monetary policy moves could increase the nervousness in the markets,” said Ashish Agrawal, a fixed-income strategist at Merrill Lynch & Co. in Hong Kong. “Expectations are that the tight liquidity phase will last longer and the start of the borrowing programme will push up yields.”
The Central government plans to sell Rs92,000 crore of bonds in the six months through 30 September as part of its annual borrowing programme.
RBI may add to the supply by selling so-called stabilization bonds meant to absorb excess cash from the financial system. RBI, which resumed selling the securities last month after a gap of almost two years, tripled the size of a sale last week to Rs6,000 crore.
India’s annual inflation rate, measured by wholesale prices, rose as high as 6.73% in the week ended 3 February, the most since December 2004, according to the ministry of commerce and industry.
The rate has kept above 6% every week this year.
Reserve Bank of India Governor Yaga Venugopal Reddy, who on 31 January said his “medium-term goal” was to keep inflation below 5%, raised the overnight lending rate nine times and the overnight borrowing rate six times since October 2004.
Reddy also lifted the cash reserve ratio for banks by 1.5 percentage points in six phases to mop up as much as Rs43,000 crore in excess funds.
“It is important to reinforce the measures already taken for maintaining price stability and anchoring inflation expectations,” the central bank said in a statement accompanying its 30 March decision.
RBI may also be preparing to drain more cash from the system as it prepares to purchase dollars to curb gains in the rupee, ICICI’s Prasanna said. “This was a pre-emptive move,” he said. “In a tight liquidity environment, the rupee will be under pressure to appreciate, and it appears they’re particular about how they manage the currency.”
The rupee surged to 43.025 to the dollar on 28 March, the strongest in eight years. The currency traded at 43.49 on 30 March, according to data compiled by Bloomberg.