Bonds fall sharply to over two-year low on April inflation worries

Indian bonds fell sharply on Monday on worries that April consumer inflation number could be higher than expected which could in turn prompt the central bank to raise rates sooner than later.

The rupee also fell to an over 15-month low on lower dollar supply and strong demand from oil importers.

The benchmark 10-year bond yield ended at 7.83 percent, its highest since February 2016 and compared with 7.73 percent on Friday. The rupee closed at 67.50 to the dollar, its lowest since February 2017 and compared with 67.34 on Friday.

"Sentiment is extremely frail and even at the smallest hint of concern traders are panicking," said a dealer at a private bank.

After initially rising, bonds started to sell off on higher-than-expected April wholesale price inflation which stood at 3.18 percent, triggering concerns that the retail inflation would also notch up more than pencilled in by many.

India's consumer price index inflation stood at 4.58 percent, higher than an estimated 4.42 percent, validating the concerns of the investors who sold off on worries that the Reserve Bank of India might clearly indicate a rate hike in its upcoming monetary policy review in June.

April consumer inflation was the last print before the RBI's next monetary policy meeting due on June 6.