Bond yields rise to 16-month high

Bond yields rise to 16-month high

Mumbai: India’s 10-year bonds fell, pushing yields to their highest level in 16 months, before a report next week that economists forecast will show inflation accelerated at the fastest pace since November 2008.

The yield on the benchmark note rose the most in almost seven weeks after Reserve Bank of India governor D. Subbarao said government borrowings will probably be slightly higher in the fiscal year starting April from a year earlier.

Wholesale prices increased 8.3% in January from the previous year, according to the median estimate of economists surveyed by Bloomberg before the 15 February report.

“A combination of spiralling inflation and borrowing is giving enough reason for the market to be bearish on bonds," said Killol Pandya, who manages the equivalent of $152 million (Rs708.32 crore) of local debt at Shinsei Asset Management (India) Pvt. Ltd in Mumbai. “It’s not going to be a pretty picture on the fiscal side."

The yield on the 6.35% note due January 2020 rose 8 basis points to 7.78%, the highest level since October 2008, at close in Mumbai, according to the central bank’s trading system. The price dropped 0.53, or 53 paise per Rs100 face amount, to 90.23. A basis point is 0.01 percentage point.

India can’t afford to be lax about fighting inflation as the nation seeks to slow price gains to 5% or less, central bank deputy governor K.C. Chakrabarty said on 7 February. The monetary authority increased the cash reserve ratio, the proportion of reserves that lenders should keep with it, by 75 basis points to 5.75% on 29 January to curb price increases.

Asia’s third largest economy needs to anchor inflationary expectations without targeting a specific rate, central bank deputy governor Subir Gokarn said on Wednesday.

The wholesale price index rose 7.3% in December, according to government data.

India on 5 February completed its record Rs4.51 trillion ($96.8 billion) of borrowing for the current financial year. Finance minister Pranab Mukherjee on 26 February will unveil the Budget for the next fiscal year, which will also contain its borrowing targets.

The Budget deficit is unsustainable and must be cut, C. Rangarajan, chairman of the Prime Minister’s economic advisory council, said on Wednesday.

The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose four basis points to 7.12%.

Manish Modi in New Delhi contributed to this story.