Colombo/Mumbai: The benchmark 10-year bonds should rally because the yield is too high, according to the Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty.

The yield on the 6.90% bond maturing in July 2019, last week rose eight basis points to 7.17%, according to data compiled by Bloomberg. It reached 7.47% on 4 September, the highest level for a benchmark 10-year issue since November 2008. A basis point equals one-hundredth of a percentage point.

“I believe the 10-year bonds are not at their real rate," Chakrabarty said in an interview, without elaborating on why yields are too high. “Seven percent is more reasonable.

Bond yields have increased 1.91 percentage points this year as the government announced record debt sales to finance stimulus needed to combat the economic slump.

The Asian Development Bank predicts gross domestic product will increase 6% this fiscal year, which would be the smallest gain since the 12 months ended March 2003. Government bonds lost 5.4% so far this year, the worst performance among 10 local-currency debt markets tracked by HSBC Holdings Plc indices.

Chakrabarty said RBI lets demand and supply conditions determine the exchange rate.

“If you appreciate the currency, exports will suffer," he said. “So you have to keep the balance. That’s why we ask markets to determine the rates."

The rupee rose 0.2% last week to 48.06 per dollar in Mumbai. It will climb 3.4% to 46.50 by the end of March, according to a median estimate of analysts surveyed.