Bonds Plunge as Indian Policy Makers Unexpectedly Hold Key Rate

(Bloomberg) -- Indian sovereign bond yields climbed the most in more than three years after policy makers surprisingly kept interest rates unchanged ahead of a probable increase in U.S. borrowing costs this month.

The monetary policy committee led by Reserve Bank of India Governor Urjit Patel left the benchmark repurchase rate at 6.25 percent, according to a central bank statement in Mumbai on Wednesday. The outcome was predicted by only eight of 44 economists in a Bloomberg survey, while 31 expected a cut to 6 percent and five saw a reduction to 5.75 percent.

The yield on government notes due September 2026 jumped 21 basis points to 6.41 percent in Mumbai, prices from the RBI’s trading system show. That’s the biggest increase for a benchmark 10-year security since September 2013, data compiled by Bloomberg show. The rupee strengthened 0.4 percent to 67.6350 per dollar in a seventh day of gains, its longest winning streak this year.

“Bonds are reacting negatively as a rate cut and some liquidity easing was priced in by the market,” said Gopikrishnan MS, the Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc.

Consumer-price inflation slowed to a 14-month low in October, spurring bets for monetary easing. Calls for a rate cut intensified further as the government’s shock Nov. 8 move to invalidate 86 percent of India’s currency in circulation threatened to dent demand in the cash-driven economy. Global banks including Credit Suisse Group AG and Deutsche Bank AG slashed full-year growth forecasts for Asia’s third-largest economy.

While “supply disruptions in the backwash of currency replacement may drag down growth this year, it is important to analyze more information and experience before judging their full effects and their persistence,” the RBI said in a statement.

Fed Decision

Bonds surged in the runup to the policy decision as the currency recall saw citizens rushing to banks to deposit the defunct notes, flooding the financial system with cash and boosting demand for debt. The 10-year yield sank 55 basis points in November. The central bank on Wednesday said it will withdraw the temporary increase in lenders’ cash reserve ratio requirement that it announced last month.

“Globally, the imminent tightening of monetary policy in the U.S. is triggering bouts of high volatility in financial markets, with the possibility of large spillovers that could have macroeconomic implications for” emerging-market economies, according to the RBI’s statement.

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Shikhar Balwani, Andrew Janes