Mumbai: India’s nine-year bonds fell, driving yields to an eight-month high, on speculation the central bank will increase interest rates later this month to cool inflation.
The notes dropped for a third day after Chakravarthy Rangarajan, the Prime Minister’s top economic adviser, said in an interview on 7 January that persistent price gains may require higher borrowing costs.
“India is facing an unstable price regime,” finance minister Pranab Mukherjee said on 8 January.
“High inflation and hawkish statements from policymakers are damping investor sentiment,” said Roy Paul, a deputy general manager at Federal Bank Ltd in Mumbai. “The central bank may hike rates by 50 basis points this month.”
The yield on the benchmark 7.80% bond due in May 2020 rose two basis points to 8.22 in Mumbai, according to the central bank’s trading system. Earlier, the yield rose as much six basis points to 8.26%, the highest level since May. The price fell 0.15, or 15 paise per Rs100 face amount, to 97.28.
The Reserve Bank of India is set to review monetary policy on 25 January. The central bank raised the repurchase auction rate, at which it lends to banks, by 150 basis points last year to 6.25%.
“India’s inflation continues to be a worry,” Mukherjee said on Monday.
India may report this week that the benchmark inflation rate climbed from a one-year low in December as food prices rose.
The Wholesale Price Index probably increased 8.4% from a year earlier, according to the median estimate of economists in a Bloomberg News survey before the data is published on 14 January. The gauge gained 7.48% the previous month, the least since December 2009.
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose two basis points to 7.29%.