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India’s benchmark 10-year bond fell to its lowest level in more than 16 months on Wednesday, while shares weakened after unexpectedly high November consumer inflation created the prospect the Reserve Bank of India (RBI) could raise interest rates sooner than expected.
The benchmark 10-year bond yield was up 3 basis points at 7.22 per cent by 0443 GMT after rising to as high as 7.25 per cent, the highest since July 2016.
The broader NSE Nifty was down 0.2 percent.
The partially convertible rupee was trading at 64.44 per dollar versus its previous close of 64.40. In India, the currency follows foreign-exchange flows and shares, rather than track interest rate changes.
The market reaction came after data late on Tuesday showed annual inflation accelerating to a 15-month high of 4.88 per cent in November, driven by a surge in food prices.
That was sharply above the central bank’s 4 percent medium-term inflation target and its projection that inflation would accelerate to 4.3 to 4.7 per cent in the six months to March. A Reuters poll had forecast inflation of 4.2 per cent in November.
Worryingly, core inflation last month also accelerated, hitting 4.9 per cent from an average of 4.3 per cent over the prior six months, according to DBS Bank estimates.
Analysts said they still expect the RBI to hold its repo rate at a more than 7-year low of 6.00 per cent after last cutting it in August, but warned that the odds of a hike had risen. The central bank could also shift to a tightening bias from its current neutral stance, they added.
The RBI’s monetary policy committee (MPC) holds its next policy meeting in early February.
“We now see 30 per cent chance of a precautionary rate hike in the February policy itself, with the MPC facing an acute tradeoff between sluggish growth and rising inflation for the first time in its short existence,” Citigroup said in a note to clients on Wednesday.
Raising interest rates won’t be an easy call for the RBI. Although annual economic growth recovered to 6.3 per cent in July-September, halting a five-quarter slide, that is still below the 8 per cent India needs to create jobs.
Data on Tuesday also showed that annual industrial output grew a lower-than-expected 2.2 per cent in October, falling short of a forecast of 3.0 per cent in a Reuters poll of economists.