Inflation spurs spike in bond yield; rupee hits 1-month low

India’s benchmark 10-year bond yield closed at its highest level in more than six weeks while the rupee ended at a one-month low on the back of a larger-than-expected surge in retail inflation.

The benchmark 10-year bond yield ended at 6.04%, after touching 6.05%, its highest since April 30 and up 4 basis points on the day.

Retail inflation rate rose 6.3% year-on-year in May, from 4.29% in April and sharply above analysts’ estimate of 5.3%. The wholesale price inflation rate rose 12.9%, its highest in at least two decades.

Traders are worried the spike in inflation beyond the RBI’s mandated target band of 2%-6% could force it to act sooner on inflation, but two senior sources said the growth focus will continue for the time being.

“The latest data would make RBI wary of continuing to boost liquidity in a big way, and whether RBI stops unwinding its forwards book, or limits bond market intervention to announced G-SAP will be closely eyed,” Abhishek Upadhyay, economist at ICICI Securities Primary Dealership said in a note.

The G-SAP or government securities acquisition programme of the RBI has been crucial in ensuring the government’s massive ₹12.06 trillion borrowing programme goes smoothly, and more measures may be needed to support markets.

The rupee closed at 73.3125 per dollar aftertouching 73.32, its weakest since May 14.

Traders said inflation and demand for dollars by importers weighed on the local unit and they would keenly watch out for the outcome of the upcoming Fed meeting.