The rise in prices this month pushed the yield on debt to the lowest in nine weeks on speculation slowing growth in Asias third-biggest economy will help curb inflation from the fastest in more than 16 years.
There is scope for yields to sustain the decline in the near term, said Chidambaram Lakshmanan, a fixed-income trader at IndusInd Bank in Mumbai. The data this week renewed interest to buy debt.
The yield on the 8.24% note due April 2018 dropped 11 basis points to 8.66% as of 11:40 am in Mumbai, taking the decline to 66 basis points, or 0.66 percentage point for August, according to the central bank's trading system. The price this month rose Rs 4.08 per Rs 100 face amount to Rs 97.25.
The government onThursday had said wholesale prices climbed 12.4% in the week ended August 16 from a year earlier, after increasing 12.63% in the previous week, which was the biggest gain since June 1992. Economists in a Bloomberg News survey were expecting a 12.78% gain.
The economy grew 7.9% in the three months to June 30 from a year earlier, the slowest pace since 2004, the Central Statistical Organisation said on Friday. Analysts expected gross domestic product to increase to 8%.
The cost of benchmark interest-rate swaps, or derivative contracts used to guard against rate fluctuations, dropped for a second day. The five-year swap rate, a fixed payment made to receive floating rates, fell to 8.895% from 9.195% on Thursday.
Meanwhile, the rupee declined this month on speculation importers exchanged the currency for dollars to pay month-end bills.
The currency closed at the lowest level in more than 17 months on concerns slowing growth and inflation near a 16-year high will prompt overseas investors to dump more local shares. The government said Asias third-biggest economy expanded in the second quarter at the slowest pace since December 2004.
Sentiment is not supportive of buying the local currency because of widespread dollar demand, said Shashi Ranjan Giri, a trader with state-owned Allahabad Bank in Mumbai. The equity market trend is suggesting we may see some more stock sales by overseas investors.
The rupee weakened 3.1% this month to 43.935 against the dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. It fell 0.4% on Friday.