India s 10-Year Bonds Complete Weekly Loss on Inflation Concern

By Bloomberg Aug 27 2011

India s 10-year bonds completed the first weekly loss this month after the central

bank said efforts by the Federal Reserve to stimulate the U.S. economy might boost commodity prices and fan inflation. Yields rose to a one-week high as the government sold a total 110 billion rupees ($2.4 billion) of notes due in 2018, 2021 and 2027 today.

The offer is part of the government s 4.17 trillion rupee borrowing program for the fiscal year ending March 2012. Crude prices in New York have gained 15 percent in the past 12 months, according to data compiled by Bloomberg. India imports about 80 percent of the oil it uses. Commodity-price-driven inflation continues to be a concern for bond investors, said R.S. Chauhan, Mumbai-based chief dealer of fixed-income and currencies at State Bank of Bikaner & Jaipur. Debt supplies will also damp demand. The yield on the 7.8 percent bonds due April 2021 raised five basis points this week to 8.30 percent as of the 5 p.m. close in Mumbai, according to the central bank s trading system.

The rate raised six basis points today. Given the fiscal limitations and growing signs of weakness in the U.S., the Fed has already indicated that it will pursue its near-zero rate policy at least till mid-2013, the Reserve Bank of India said in a report in Mumbai yesterday. It has also hinted at another dose of quantitative easing. This policy stance may keep the commodity prices elevated. The central bank has boosted borrowing costs five times this year to curb inflation, which has held above 9 percent for eight months. The repurchase rate is 8 percent.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased three basis points this week to 7.75 percent, according to data compiled by Bloomberg.

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