Bonds decline on inflation worries

The 10-year bond yield rose to near its highest in four months on concerns a report tomorrow will show inflation accelerated at the fastest pace in two years, prompting the central bank to increase interest rates.

Inflation probably quickened to 6.09 percent in the week ended January 6, the quickest since December 2004, according to the median estimate of 10 economists surveyed by Bloomberg. The benchmark yield may rise to a seven-month high by the end of March, said Krishnamurthy Harihar, treasurer at Development Credit Bank in Mumbai.

"The interest-rate outlook remains hawkish given the prospects for higher inflation,'' he said. "As economic growth continues, prices of commodities and manufactured goods may rise,'' which is a negative for bonds.

The yield on the benchmark 8.07 per cent bond due January 2017 rose 3 basis points, or 0.03 percentage point, to 7.83 per cent at 5:30 p.m. close of trading in Mumbai, according to the central bank's trading system. The price of the security fell 0.23, or 23 paise per 100-rupee face amount, to 101.67.

The commerce and industry ministry will release inflation data in New Delhi tomorrow at noon. Last week, another report released by the Central Statistical Organisation showed factory output in November grew at the fastest pace in more than a decade, causing yields to rise the most in more than four years on January 12.

Decline in bond prices were tempered by speculation the federal government will refrain from going ahead with an auction scheduled to be held by January 25 after tax collections grew on faster growth.

India plans to sell Rs 50 billion ($1.1 billion) of bonds, the second auction in the month, according to the government's borrowing program.

"Given the robust tax collections, the government may have almost raised enough money to go slow on its borrowing,'' said V Ravi Kumar, director of treasury at Infrastructure Development Finance Corp. "Prospects of a narrower fiscal deficit are bright and this will favour bonds in the medium term.''

Record growth in Asia's fourth-largest economy helped the government boost its direct tax revenue by 42 per cent between April 1 and December 31, the finance ministry said last week.

The government has completed only 82 per cent of its planned Rs 1.52 borrowing program for the current fiscal year, which ends March 31.

Bonds also fell after four states sold 10-year bonds at a cut-off yield of almost 8 percent at an auction today.