Bonds set to drop as inflation jumps to 5-year high

Bonds set to drop as inflation jumps to 5-year high

With high consumer prices limiting the ability of the Reserve Bank of India to cut rates further to revive economic growth, the government may be forced to spend more.

By Subhadip Sircar and Kartik Goyal

Sovereign bonds slid the most in more than a month in India after inflation surged sharply in December to hit a five-year high, casting doubts over any near-term monetary easing.
The yield on the benchmark 10-year bond rose as much as 10 basis points to 6.7%, the most since Dec. 5. Consumer prices rose 7.35% last month, exceeding the 6.7% median estimate of analysts surveyed by Bloomberg, data late Monday showed.

The inflation jump, largely driven by food prices, risks stalling the recent rally in the nation’s bond markets. With high consumer prices limiting the ability of the Reserve Bank of India to cut rates further to revive economic growth, the government may be forced to spend more.

“With average inflation for quarter nearly 200 basis points above RBI estimates, expect status quo in February policy,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai. “In the short term, sentiment on the benchmark 10-year will be hit.”

Yields on notes maturing in 2033 climbed nine basis points to 7.18%.

Separately, the RBI said that it swapped debt with the government on Monday, selling 419.2 billion rupees ($5.9 billion) worth of bonds maturing in 2020 in exchange for longer-dated notes.

The debt swap could significantly lower the probability of further Twist operations by the RBI, said Prasanna.

That would be another blow to bond traders. In an effort to lower borrowing costs without cutting rates, the RBI has been selling 2020 bonds and buying longer-dated debt.

“If there is no twist again, yields will swiftly travel to 6.75% to 6.80% range,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. in New Delhi.

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