Bonds drop most in a month as factory output quickens

Ten-year bonds fell the most in more than a month as industrial production exceeded economists’ estimates, fuelling concern the central bank will raise interest rates at a policy review this week.

The yield on the 7.80% note due May 2020 advanced seven basis points to 7.98% at the close of trade on Monday, the highest level since September 6. The price dropped 0.43, or 43 paise per Rs 100 face amount, to 98.83.

Yields rose to the highest level in a week after factory output climbed 13.8% from a year earlier in July, compared with 5.8% the previous month. The Reserve Bank of India has increased policy rates four times this year to curb inflation, which has been around 10% since February. The next review is on Thursday.

“The strong industrial output number has increased the odds of a rate increase this week,” said Krishnamurthy Harihar, treasurer at FirstRand in Mumbai.

The government will publish inflation data for August tomorrow. The wholesale price index rose 9.6% from a year earlier in August, following a 10% gain in July.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose nine basis points to 6.19%.