India rate swaps at two-week high as inflation concern mounts

[MUMBAI] India's one-year interest-rate swaps traded at a two-week high on speculation faster inflation will deter the central bank from easing monetary policy further.

The surplus seen in the monsoon rains last month has turned into a deficit in July, reigniting concern a reduction in crop output will stoke food costs. India is among nations most at risk from El Nino-linked increases in food prices, HSBC Holdings said in a report. That would exacerbate price pressures after consumer inflation rose 5.4 per cent in June, the fastest pace in nine months.

The fixed payment to lock in one-year borrowing costs was at 7.49 per cent as of 11.19 am in Mumbai, data compiled by Bloomberg show. That matches Tuesday's closing level, which was the highest since July 2. The contracts have risen six basis points this week. The yield on benchmark 10-year sovereign bonds rose one basis point to 7.83 per cent, according to prices from the central bank's trading system. The rupee was steady.

"The probability of a rate cut is down, with the overall rainfall remaining below average," said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. "The central bank will also want to see if the pick-up in inflation sustains." Food accounts for about half of India's CPI basket. Reserve Bank of India Governor Raghuram Rajan has cut benchmark borrowing costs three times in 2015 and linked further policy action to the strength of the June-September monsoons. The seasonal showers are now 5 per cent below normal, compared with a surplus of 16 per cent at the end of June.

The rupee was steady at 63.39 a dollar, prices from local banks compiled by Bloomberg show.

BLOOMBERG