Bonds fell for the second day after the central bank signaled it may need to raise interest rates should increases in food prices persist. The rupee strengthened, snapping a three-day decline, on speculation the South Asian nation?s relative fast economic growth will attract investors.
Reserve Bank of India governor Duvvuri Subbarao said he may use monetary policy to temper investor expectations for inflation if food costs continue to rise ?for a long time.? Demand for debt?s fixed-income payments also waned as economists estimate a report on Friday will show growth in industrial production accelerated to the fastest pace in two years.
?The governor?s statement is negative for bonds because it looks like some policy action may be taken sooner rather than later,? said Baljinder Singh, a fixed-income trader with Andhra Bank in Mumbai. ?Expectations of strong growth in industrial output is also hurting bonds.?
The yield on the 6.9% note due July 2019 rose six basis points to 7.54% in Mumbai, its highest closing level since the bond began trading in July, according to the central bank?s trading system. The price fell 0.40, or 40 paise per 100 rupee face amount, to 95.70. A basis point is 0.01 percentage point. The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed. The rate, a fixed payment made to receive floating rates, was at 4.88 %.
The currency gained before a government report due Dec 11 that economists forecast will show October industrial output rose the most since March 2007. Net purchases of Indian equities by overseas investors have averaged $202 million a day this month, compared with $59 million in November, data released by the Sebi show.