Bonds fell, reversing earlier gains, on concern the government?s plan to increase spending this year to cap food prices may result in more debt. Yields on benchmark 10-year notes rose for the first time in three days after the government yesterday sought lawmakers? approval to spend an extra $6.6 billion, in part to subsidize food and fertilisers to curb inflation. The wholesale food-price index for November rose to an 11-month high, a government report showed last week.
?The government?s plan to spend more has added some uncertainty as we don?t know whether they will borrow more,? said Bekxy Kuriakose, a senior fund manager at DBS Cholamandalam AMC Ltd. ?It is negative for bonds.?
The yield on the 6.9% note due July 2019 rose five basis points to 7.48% at the close.
Meanwhile, rupee strengthened, snapping a three-day decline, on speculation the South Asian nation?s relative fast economic growth will attract investors. The rupee advanced 0.3% to 46.5425 per dollar at the close. ?There?s no reason for the rupee to weaken because economic fundamentals are in its favour,? said PV Rao, head of currency and fixed-income trading at IndusInd Bank. ?Growth prospects remain good.?
The nation plans to spend Rs 3,460 crore on subsidising food prices for the poor and Rs 3,000 crore for subsidising fertilisers, according to a government statement.
Bonds rose earlier after the central bank signaled it isn?t ready to raise interest rates to curb price increases. RBI governor Subbarao had said monetary policy action may be needed only if food inflation ?persists for a long time.?