Mumbai: India’s 10-year bonds fell on Monday, snapping a two-day gain, after the government failed to sell Rs12,000 crore of debt at an auction on 7 August, the first such instance since March.
Yields on notes due 2019 rose to the highest level since the benchmark was issued on 13 July as the Reserve Bank of India, which conducts the sales, shunned bids. It didn’t provide a reason for the decision.
India plans to borrow a record Rs4.51 trillion in the fiscal year that started 1 April to finance the biggest budget deficit in 16 years.
“The rejection of bids has sent confusing signals and has only worsened the bearish mood in the bond market,” said Srinivasa Raghavan, head of treasury at IDBI Gilts Ltd in Mumbai. “Yields may rise further as demand may be affected.”
The yield on the 6.9% note maturing in July 2019 climbed six basis points, or 0.06 percentage point, to 7.10% when the market closed, according to the central bank’s trading system. The price declined 0.44, or 44 paise per Rs100 face amount, to Rs98.61.
Ten-year yields may increase to 7.3% in the coming weeks, Raghavan said.
Indian debt also declined on speculation that an economic recovery will cause wholesale prices to rise, which doesn’t augur well for the bond market in the longer term, according to Raghavan.
The central bank had on 28 July raised its inflation forecast for the year to around 5% from an April estimate of 4%, and said it may soon need to reverse the loose monetary policy of the past 10 months.
Finance minister Pranab Mukherjee last month unveiled plans to raise spending and widen the budget deficit to 6.8% of gross domestic product, the most since 1994. The central bank revised its economic growth outlook to 6% with an upward bias, from 6% earlier.
The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, increased the most in three weeks. The rate, a fixed payment made to receive floating rates, rose to 6.53% from 6.40% at the end of last week.