Two months of slowing inflation and a government plan to buy back bonds helped to reduce the reference yield of 2,020 titles in 11 basis points this month to 7.96 percent, headed for the biggest drop since May. Indian Oil Corp. and Bharat Petroleum, the country's largest refinery by capacity state, raised pump prices by 5.6 percent last week. The government also intends to review the prices of diesel, Petroleum Minister Murli Deora said on 13 December.
India has the highest cost loans to 10 years among the major economies of Asia after the central bank raised interest rates six times this year to curb inflation. Goldman Sachs Group Inc. and Nomura Holdings Inc. predict the Reserve Bank of India will not reach its goal of restraining price increases at a rate of 5.5 percent in March from 7.5 percent now.
"The pressure remains on bond yields rise on expectations of a new round of fuel price increases," said Mahendra Jajó, head of fixed income investments in Mumbai Pramerica Asset Managers, the local unit Prudential Financial Inc., in an interview yesterday. "Crude oil is estimated to touch $ 100 a barrel."
Diesel prices
The government has released prices of petrol pump control of the government on 25 June, helping to alleviate the losses in state refiners who sell fuel below cost. A group of ministers will meet on December 22 at the possibility of increasing diesel prices by up to 2 rupees per liter, the Press Trust of India on December 13, citing an unnamed government official.
The effect on inflation would be as much as 60 basis points if prices increase by about 2 rupees per liter after including the impact on services such as transport, Sonal Varma, economist at Mumbai-based Nomura Holdings Inc., said In an interview on 16 December. Fuel and energy account for about 15 percent of the index of wholesale prices, which India is used as a benchmark for inflation.
The yield on the benchmark 7.8 percent maturing in May 2020 rose three basis points to 7.96 percent today before the central bank's repurchase 120 million rupees worth of debt to ease cash shortages in banks.
"Major Headache"
The rate is 464 basis points, or 4.64 percentage points over U.S. similar maturity Treasuries, compared with 375 at the end of last year. The production is also 14 basis points of 7.82 percent in Indonesia, the second highest in Asia.
"Crude is the biggest headache for us that will lead to higher inflation," said Anoop Verma, a bond trader in Mumbai based in the Development Credit Bank, in an interview on 21 December. "The yield on the 10-year bonds will increase by 10 basis points to about 8 percent within one month after the diesel price is raised, for example, 2 rupees."
The difference in yields between the values of one to 10 years in India has fallen 64 basis points this month to a minimum of two years from 54. Pramerica Jajó asset managers, "says short-term notes will be most affected as the outlook for bonds remains" uncertain "about the" medium term. "
Government bonds in the third largest economy in Asia returned 5.2 percent this year, compared with 19.2 percent in Indonesia and 12.3 percent in the Philippines, according to indexes compiled by HSBC Holdings Plc.
The concern about price pressures may prompt policy makers to delay increasing costs of diesel immediately, according to NR Bhanumurthy, an economist based in New Delhi National Institute of Public Finance and Policy.
'Political Fallout "
"There could be more of a political crisis to raise prices of diesel, as it has a strong link with the general level of prices compared to gasoline," he said in an interview yesterday. "Diesel prices can not be touched until after the crucial state elections in the first quarter of next year."
The growing gap between the cost of fuel production at refineries in the nation and the domestic retail prices is a review of pump prices a necessity, ICICI Bank, the second largest bank in India, said in a research report yesterday. Crude oil peaked at 24 months of $ 90.76 a barrel on 7 December and was trading at $ 90.18 today.
Current Account
The 13 percent increase in oil prices in 2010 prompted Barclays Plc to forecast this month that the risk of expansion in India current account deficit has increased "significantly." The gap worsened to a record $ 13.7 billion in the second quarter, official data show.
The country's currency this year, underperforming the concern that the deficit will widen. The rupee appreciated by 3.2 percent, the fourth worst performance among the 10 most traded currencies in Asia. The rupee gained 0.3 percent today to 45.09 per dollar.
The cost of protecting debt of state-owned Bank of India, some investors see as a proxy for the nation, rising to 159 basis point today. The cost was reduced to an eight-month low of 155 basis points on Dec. 16, according to CMA prices.
Swaps credit-default pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to its debt agreements. A basis point equals $ 1,000 annually on a contract protecting $ 10 million of debt.
"If there is an increase in commodity prices, which have an impact on inflation," Rajeev Radhakrishnan, a fund manager based in Mumbai in Funds Management SA OSE. which oversees assets worth 9.2 billion U.S. dollars. "And finally yields move up."
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