India?s 10-year bonds fell the most in a month as an increase in petroleum product prices fueled concern that it will stoke inflation and prompt the central bank to raise interest rates.
Yields rose to their highest level in two weeks after the government today said prices of gasoline and diesel would be market driven. The benchmark wholesale-price index advanced 10.16% from a year earlier in May, approaching the fastest pace in 17 months, after a 9.59% gain the previous month.
?It is a matter of time before the central bank raises policy rates as the increase in fuel prices may spur inflation by as much as 100 basis points,? said Srinivasa Raghavan, head of fixed-income trading at IDBI Gilts.
The yield on the 7.80% note due May 2020 rose eight basis points to 7.65%. The price fell 0.58, or 58 paise per Rs 100 face amount, to Rs 101.
The government on Friday raised Rs 1,500 crore? from debt sales that may further tighten supplies of cash at banks. Overnight rates were near their highest level in three months, indicating a shortage of cash after license-fee payments by phone companies and corporate tax payments.
The central bank?s next policy meeting is scheduled for July 27. The monetary authority last raised interest rates at its April 20 policy meeting, the second increase this year. Its benchmark reverse repurchase rate is 3.75 percent and the repurchase rate is 5.25%.
?I don?t think the fuel price increase has any connection to a rate hike,? said Bekxy Kuriakose, who manages the equivalent of $440 million in Indian debt at L&T Investment Management. ?There has already been 150 basis points tightening in rates due to reduced liquidity and the effective rate now is the repurchase rate.? India?s rising prices are a concern that the central bank will have to weigh against the risks to growth from the European debt crisis, finance minister Pranab Mukherjee said on Thursday.