Bonds decline on fuel inflation concern

Ten-year bonds dropped on concern the biggest slide in the rupee since 2008 will boost import costs and fuel inflation, prompting the central bank to add to this year's six interest-rate increases.

Yields on most-traded debt due 2021 climbed as the Indian currency fell to a two-year low, extending this quarter's loss to 7% in the worst performance since the collapse of Lehman Brothers Holdings.

The yield on the 7.8% bonds due April 2021 rose 1 basis point, or 0.01 percentage point, to 8.34% at the 5 pm close in Mumbai, according to the central bank's trading system. Ten-year yields in India have climbed 42 basis points this year, the most after Vietnam among Asia's local-currency debt markets, as the local inflation rate held above 9%, data compiled by Bloomberg show.

Currency declines are already stoking fuel prices in India, which buys almost 80% of the oil it uses overseas. The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 3 basis points to 7.97%.