DBS says wider deficit factored in by rate markets

DBS says India's widening current account deficit is bad news for rate markets, but does not mean sustained upward pressure for rates lies ahead.

The wider deficit means India in the fourth quarter of 2012 was not able to move towards a better balance between internal and external demand, says the note.

"This should mean that domestic interest rates need to remain high to play their part in cooling the economy and achieving this balance," says DBS.

It adds, policy makers need to remain credibly committed to reforms to help attract capital inflows to offset the net outflows under the current account.

"Overall, then, the wider current account is disappointing, but it does not tell a story that markets don't already know," it says.

Tips yield on 10-year government bonds should stay below 8% and end the quarter lower at around 7.75%.