Speculation of rate rise pushes bond yields to two-month high

Bond yields rose to a two- month high after inflation exceeded the central bank’s forecast, fuelling speculation that the monetary authority will boost borrowing costs for a third time this year.

The wholesale price index rose 8.98 per cent in March from a year earlier, compared with 8.31 per cent in February, according to data published by the commerce ministry on April 15. The Reserve Bank of India had predicted inflation of 8 per cent at the end of March. The next interest rate review will be on May 3.

“Inflation concerns are worrying investors,” said R S Chauhan, chief dealer of fixed-income and currency at State Bank of Bikaner & Jaipur in Mumbai. “Another rate hike is definitely on the cards and I won’t be surprised if the lending rate is increased by 50 basis points.” (click here for graphs)

The yield on the 8.08 percent note due August 2022, the most-traded government debt, rose one basis point to 8.25 per cent at the 5 pm close in Mumbai, according to the central bank’s trading system. Earlier, the rate touched 8.27 per cent, the highest since February 7.

India’s inflation remains a cause for concern, Reserve Bank of India’s Deputy Governor, Shyamala Gopinath, said in Kolkata on Monday.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose two basis points to 7.7350 per cent. It had touched 7.77 per cent, the highest level since October 2008, earlier on Monday.

The repurchase auction rate, at which lenders borrow from the central bank, was raised by 25 basis points, or 0.25 percentage point, to 6.75 per cent in March. The rate has increased by two percentage points since the beginning of 2010.

Rupee down
The rupee fell, extending last week’s losses, as a decline in the benchmark stock index raised concerns foreign funds will reduce holdings of the nation’s assets.

The rupee reversed earlier gains as data from the stock market regulator showed overseas funds sold Indian shares worth $20.3 million more than they bought last week. They purchased a net $1.6 billion of equities the previous week, according to data provided by Securities and Exchange Board of India.

“The sentiment for local stocks is not strong so any gains the currency makes are difficult to hold on to,” said Naveen Raghuvanshi, a Mumbai-based currency trader at Development Credit Bank Ltd. “The undertone in the near term is weak for local assets.”

Call rates ease
Call rates eased to close at 6.85 per cent at the overnight call money market on Monday due to lack of demand from borrowing banks, while the government bond closed mixed on alternative bouts of buying and selling. The call money rate ended slightly lower at 6.85 per cent from last Friday’s closing level of 6.90 per cent. It moved in a range of 6.90 per cent and 6.80 per cent.