India’s 10-year bonds dropped, pushing the yield to the highest level in more than three months, on speculation the central bank will increase borrowing costs for a fifth time this year to combat inflation. Containing the increase in prices “may have to receive precedence over other policy objectives,” the Reserve Bank of India said yesterday. Bond yields have climbed five basis points this week ahead of an auction of 80 billion rupees ($1.7 billion) of bills today and 120 billion rupees of government bonds on Aug. 27. “We can expect one more round of rate increases as soon as next month,” said S. Srikumar, a fixed-income trader at state- owned Corporation Bank in Mumbai. “Investors are also probably refraining from adding to their positions as more debt sales are due.” The yield on the 7.80 percent bond due in May 2020 rose one basis point, or 0.01 percentage point, to 8.02 percent as of 10:20 a.m. in Mumbai, according to the central bank’s trading system. The rate touched 8.03 percent earlier, the highest level since May 3. The price fell 0.12, or 12 paise per 100 rupee face amount, to 98.50. The central bank may raise its policy rates by 25 basis points each at its next policy review on Sept. 16, said Srikumar. The reverse-repurchase rate, at which it drains cash from banks, is at 4.5 percent, while the repurchase rate, which it charges on overnight loans, is at 5.75 percent. The monetary authority last raised interest rates on July 27. Last month, the Reserve Bank raised its forecast for wholesale-price inflation at the end of March 2011 to 6 percent from 5.5 percent. The rate was 9.97 percent in July after holding above 10 percent in the previous five months. To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

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