Bonds posts fifth quarterly loss on inflation concern

Ten-year bonds completed its fifth quarterly decline, the longest losing streak since 2006, on concern that accelerating inflation will prompt RBI to further tighten monetary policy.

The yield on the 6.35% note due January 2020 was at 7.85% at the close of trade on Wednesday, up from 7.59% at the end of last year. The price fell Rs 1.50 per Rs 100 face amount in the quarter to 89.90.

Yields rose 26 basis points in the quarter after the RBI lifted its benchmark borrowing rate by 0.25 percentage points to 3.5% on March 19, the first increase since 2008. Wholesale-price inflation quickened to 9.89% in February, the most in 16 months.

“More interest-rate increases are anticipated in the months ahead to curb inflation,” said Sanjay Arya, treasurer at state-owned Bank of Maharashtra in Mumbai. “It will be a fine balancing act between growth and inflation.”
Arya predicts RBI will raise benchmark policy rates by 150 basis points in the new financial year. The cash reserve ratio, the proportion of deposits that banks should keep with the central bank, may be increased by 100 basis points, he said. A basis point is 0.01 percentage point.

The 10-year bonds may slide further on record government borrowing and likely increases in the RBI's policy rate, said JPMorgan Chase.

The government plans to raise Rs 2.87 lakh crore ($65.6 billion) in debt in the first half of the year from its full-year target of Rs 4.57 lakh crore.

The yield on the 10-year notes will rise as much as 65 basis points to 8.5% by June, Abhishek Panda and Bert Gochet, analysts at JPMorgan, wrote in a research report on Wednesday. That would be the highest level for a benchmark bond of that maturity since September 2008.

“Bond buyers will start to react negatively to the continued stream of large auctions,” the research report said. “The central bank is expected to step up its tightening cycle from its April 20 meeting.”