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Indian Government Bond Yields Climb as Inflation Worries Return

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12/22/2017 | 08:57am CET
By Saumya Vaishampayan 

A selloff in Indian government debt has pushed the yield on 10-year bonds to its highest level since July 2016, as investors assess the country's monetary-policy outlook.

India's government-bond yields have largely risen since the summer on expectations that inflation will pick up, which would limit the Indian central bank's ability to further loosen monetary policy. The Reserve Bank of India cut its main lending rate in August.

The yield hit 7.281% on Thursday and pulled back slightly Friday. Bond yields rise as prices fall.

Indian stocks and the rupee have been on a tear. The Sensex is up 27% this year, logging its latest record close on Tuesday, and the country's currency hit a three-month high against the dollar this week. The rupee is up 0.7% so far in December versus the dollar.

Analysts said the latest catalyst for India's bond selloff was inflation data released last week. Inflation surged in November to its highest level since August 2016 as prices of food and fuel increased. Rising inflation hurts bondholders by chipping away the purchasing power of the fixed payments they receive.

Central-bank officials sounded concerned about rising prices at their December meeting, according to the minutes released Wednesday.

"The chance that they're going to be able to cut rates has come off significantly," said Irene Cheung, senior Asia strategist at Australia and New Zealand Banking Group in Singapore. That helped spur the rise in yields.

U.S. government-bond prices have also declined in recent sessions, with the yield on the benchmark 10-year Treasury note settling at a nine-month high Wednesday.

Investors sent billions of dollars into emerging-market bonds this year, as relatively accommodative stances at major central banks fueled demand for riskier, higher-yielding assets.

India was a major beneficiary of that cash. Foreign investors poured a net $22.7 billion into India's debt market this year through November, according to ANZ. That appetite cooled last month, however, as foreign investors yanked a net $200 million out of Indian bonds, the first monthly outflow since January.

Write to Saumya Vaishampayan at [email protected]

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