Bonds erase gain after central bank flags inflation risk

Ten-year bonds surrendered an early advance after RBI deputy governor Subir Gokarn said the inflation rate may remain above the “comfort zone.”

The yield was near a two-week high on speculation the Reserve Bank of India will add to this year’s five interest-rate increases to keep consumer prices from climbing too fast. Average inflation rate during the first eight months of 2010 jumped almost sevenfold to 9.8% from the year-earlier period.

“Bonds have retreated on renewed expectation that the central bank will raise rates further to contain inflation,” said Arvind Sampath, head of interest-rate trading at Standard Chartered in Mumbai.

The yield on the 7.80% note due May 2020 was little changed at 7.94% at the close of trade on Tuesday. The price fell 0.01, or 1 paise per `100 face amount, to 99.06.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, climbed for a fifth day. The rate, a fixed payment made to receive floating rates, rose to 6.67% from 6.63% on Monday.