Bonds fall on high inflation

India's bonds fell on third consecutive week after a report showed inflation accelerated more than expected.

Ten-year yields rose to the highest in a month as the cost of borrowing money overnight climbed to the most since January on concern tax payments due in March will reduce spare funds at banks, the biggest buyers of government debt.

Wholesale prices increased at the quickest in two months, the commerce ministry said today, fuelling concern the central bank will raise interest rates to slow the economy.

"It's becoming increasingly difficult to say when inflation will moderate on a sustained basis,'' said K P Suresh Prabhu, chief of fixed income in Mumbai at HDFC Bank, India's third-biggest lender by market value. "Until such time, there will be pressure on bond yields to rise.''

The yield on the benchmark 8.07 percent bond due January 2017 rose 3 basis points, or 0.03 percentage points, this week to 8.02 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The price fell 0.19, to 100.35. Bond yields move inversely to prices.

Finance Minister Palaniappan Chidambaram today said he expects inflation to slow to an average of 5.4 per cent in the year ending March 31. The government will take steps to curb rising prices, he said.