Mumbai: India’s benchmark bonds tumbled the most in at least eight years, the biggest fluctuation of any government debt market on Friday, as the nation’s borrowing costs at a debt auction surged amid accelerating inflation.
Ten-year yields soared to a seven-year high after the central bank said the government sold similar-dated debt at 9.13%, the highest level since 2001. The ministry of commerce and industry said wholesale prices rose 11.63% in the third week of June from a year earlier, the most since February 1995. The benchmark yield climbed 0.57 percentage point this week, compared with 0.18 percentage point in all of 2007 and 0.5 percentage point in 2006.
The increase in bond yields “reflects the inflation trend and expectations”, said K. Ramanathan, who manages the equivalent of $2.2 billion (Rs9,504 crore) in Indian debt at ING Investment Management (I) Pvt. Ltd in Mumbai.
The yield on the 8.24% note due April 2018 surged 34 basis points to 9.15% as of the 5.30pm close in Mumbai, according to the central bank’s trading system. The price fell Rs2.11 per Rs100 face amount to Rs94.15. A basis point is 0.01 percentage point.
The government sold Rs6,000 crore of the 2018 notes at a cut-off price of Rs94.28 per Rs100 face amount, or a yield of 9.13%, the Reserve Bank of India (RBI) said in a faxed statement. It also sold Rs4,000 crore of the 8.28% notes due 2032 at a cut-off price of Rs84.30 per Rs100 note, or a yield of 10.03%.
Traders expected the government to sell the 10-year and 24-year securities at 9.11% and 9.8%, respectively, according to a Bloomberg survey.
The central bank increased its benchmark interest rate twice last month and signalled it is prepared to act further should prices gain at a faster pace. RBI raised its overnight lending rate by 0.5 percentage point on 24 June, the most since 2000, to 8.5% as the inflation rate tripled this year. Policymakers are scheduled to meet on 29 July to review interest rates.
Bonds also fell on speculation that crude oil prices at an all- time high and a weakening rupee will add to inflation and erode the value of the debt’s fixed payments.
The inflation rate in Asia’s third largest economy, which imports 70% of its oil requirement, has tripled this year. Crude oil more than doubled in the past 12 months to touch an all-time high of $145.85 a barrel on the New York Mercantile Exchange on Thursday.