Mumbai: India’s bonds fell, pushing yields to the highest in more than a week, on concern that crude oil prices, near a record high, will stoke inflation, cutting the value of the fixed payments from debt.
Benchmark securities due in 2017 had a weekly loss after the government said inflation accelerated to the fastest pace since June, with wholesale prices climbing a third week. Bonds also dropped as quarterly tax payments next week by companies may drain money from the financial system, spurring banks to sell debt to replenish cash.
“Crude at $106 (Rs4,293) isn’t something that can be ignored,” said Krish Ramkumar, who manages the equivalent of $1.1 billion in Indian debt at Sundaram BNP Paribas Asset Management Co. in Mumbai. “With inflation risk rising, I’m being very cautious with my bond portfolio.”
The yield on the most-traded 7.99% note, due July 2017, rose 4 basis points, or 0.04 percentage point, to 7.58% at close, according to the central bank’s trading system. The price fell 0.25, or 25 paise per Rs100 face amount, to 102.69.
Yields have risen 11 basis points in the last one month as crude oil gained 19.8%. Oil reached a record $105.97 per barrel in New York on Thursday as losses in the dollar prompted investors to buy commodities. The cost of India’s monthly oil imports climbed to a record $7.7 billion in January, the commerce ministry said on 3 March.
India’s 2017 yields may rise to 7.70% by the end of this month, according to the median estimate in a Bloomberg News survey of 11 economists and strategists.
Wholesale prices climbed 5.02% in the week ended 23 February from a year earlier, faster than the previous week’s 4.89% gain, the ministry of commerce and industry said in New Delhi on Friday.
Oil’s advance to more than $100 a barrel prompted India to raise domestic fuel prices on 14 February for the first time in 20 months. The central bank held its key interest rate near a six-year high at its most recent meeting on 29 January, citing costlier oil as a risk.
Bonds also fell on speculation corporate tax payments and capital outflows from the equity market will drain money from the financial system.
“Corporate tax outflows and fund outflows from the equity market are likely to lead to a liquidity squeeze, pushing overnight borrowing rates higher,” Sundaram BNP’s Ramkumar said. “People aren’t going to be comfortable maintaining their bond positions in such circumstances.”
Indian companies may pay as much as Rs60,000 crore in taxes by 15 March, Ramkumar said.