Mumbai: India’s 10-year bonds declined on speculation inflation will accelerate from a 16-month high, increasing pressure on the central bank to raise borrowing costs for a second time this year.
The Reserve Bank of India (RBI) lifted its benchmark borrowing rate by 0.25 percentage point to 3.5% on 19 March, the first increase since 2008, after wholesale-price gains quickened to 9.89% in February. Inflationary pressures are stronger than anticipated and India may have to take steps that sacrifice economic growth in the short term to address them, central bank governor D. Subbarao said on 22 March.
“As of now, the risk is on inflationary pressures for the bond market,” J. Moses Harding, executive vice-president at IndusInd Bank Ltd in Mumbai, wrote in a research note on Thursday. “Increases in the wholesale price index may shoot past 10% and the road map for monetary triggers will become clear.”
The yield on the 6.35% note due January 2020 rose 3 basis points to 7.88%, according to the central bank’s trading system. The price fell 0.21, or 21 paise per Rs100 face amount, to 89.69.
Rising commodity prices, higher capacity utilization heighten the risks of supply side pressures translating into a generalized inflationary process, RBI said in a report on Thursday. Given the emergent pressures on the inflation front and the large fiscal borrowing programme, there are likely to be pressures on yields, which may have some impact on the cost of funds of banks.
The government plans to borrow a net Rs3.45 trillion in the fiscal year starting 1 April, compared with Rs3.98 trillion in the previous year.