Bond prices drop as inflation accelerates

Eleven-year bonds fell the most in five weeks after inflation accelerated unexpectedly in February. The wholesale-price index rose 8.31% from a year earlier after increasing 8.23% in January, the commerce ministry said on Monday. The Reserve Bank of India will review its policy rate on March 17.

The yield on the 8.08% bond due August 2022 rose four basis points, the most since February 4, to 8.10% in Monday’s trade, according to RBI’s trading system. “Inflation isn't coming under control, and food and fuel prices continue to be the bugbears,” said Killol Pandya, who manages the equivalent of $300 million at Daiwa Mutual Fund.

“Overall, it's not a pretty picture, and I am bearish on bonds.” The Reserve Bank of India will increase its repurchase rate, at which it lends overnight to banks, by 25 basis points to 6.75% at this week's review, Pandya said. The yield on the 10-year bond, now at 7.95%, may touch 8.40% by the end of June, he said.

The central bank has raised its policy rates seven times in the past year. India's inflation remains a "concern," Finance Minister Pranab Mukherjee told reporters in New Delhi on Monday, adding that he expects the measure to slow to a range of 7% and 7.5% by the end of March. The cost of one-year interestrate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose eight basis points to 7.40%.