Government bonds dropped for a second day, pushing yields to 31-month highs, on speculation that domestic fuel prices will be raised this month.
Fuel prices may be increased after results of elections in five states are announced on 13 May, said Krishnamurthy Harihar, treasurer at FirstRand Bank Ltd in Mumbai. Reserve Bank of India (RBI) governor D. Subbarao said on Monday that global oil prices posed a risk to inflation and the government’s budget-deficit target. India, which imports more than 75% of its oil, hasn’t raised gasoline prices since January.
“Increasing fuel prices is a tough choice, Harihar said. “If you do that, inflation will accelerate. If you don’t, subsidies will rise, which will spur more borrowing. So anyway it’s negative for bonds.”
The yield on the 7.8% note due April 2021 rose two basis points, or 0.02 percentage point, to 8.28%, according to the central bank’s trading system. Earier, it touched 8.3%, the highest level for a 10-year bond since October 2008.
India plans to reduce the fiscal deficit to 4.6% of gross domestic product in the year that began 1 April from 5.1% in the previous 12 months, finance minister Pranab Mukherjee said on 28 February while presenting the budget.
A lot of developments have taken place since the budget, particularly oil prices have gone up and that calls into question the feasibility of reaching the target given in the budget, Subbarao told reporters in Basel, Switzerland, on Monday.
Official data on 15 April showed India’s benchmark wholesale price index rose 8.98% in March from a year earlier, exceeding the RBI’s 8% estimate. Figures for April are due 16 May.
The cost of one-year interest-rate, or derivative contracts used to guard against fluctuations in borrowing costs, rose two basis points to 8.09%.
The rupee weakened for the third time in four days after overseas funds sold local stocks on concerns that rising borrowing costs will damp economic growth.
Foreign investors reduced holdings of Indian equities by a total $1.19 billion in the past two weeks as the Bombay Stock Exchange’s sensitive index declined, exchange data show. The central bank raised its repurchase rate by 50 basis points to 7.25% on 3 May and said economic expansion may slow to around 8% in the year that began 1 April from an estimated 8.6% in the previous 12 months.
“Whatever strength the rupee had is gone as the stock markets haven’t been strong,” said Naveen Raghuvanshi, a Mumbai-based currency trader at Development Credit Bank Ltd. For the next three months, the rupee looks bearish, he added.
The Indian currency fell 0.1% to 44.76 per dollar, according to Bloomberg data. It touched a one-month low of 44.9 on 6 May and is the worst performer this quarter among Asia’s 10 most-traded currencies with a 0.4% loss.
Anil Varma and Khalid Qayum in Singapore contributed to this story.