Indian bonds see biggest one-day fall in a month on higher WPI

MUMBAI: Indian government bonds saw their biggest single-day fall in a month on Monday after data showed wholesale price-based inflation climbed more than expected, raising concerns the central bank may not be as forthright in cutting interest rates.

India's wholesale price inflation rose to a five-month high in May, adding to worries that disappointing rains could lead to higher food prices and turmoil in Iraq could cause a spike in global oil prices.

Wholesale prices in May rose a faster-than-expected 6.01 percent, driven mainly by higher food and fuel costs, government data showed on Monday.

The data comes days after the release of figures showing consumer price inflation hit a three-month low of 8.28 percent in May. The central bank closely tracks consumer inflation when setting interest rate policy.

"I don't think the RBI will change its stance based on just one data point. Its just the market which was factoring in a rate cut sooner than next year and now the views have shifted back to the rate cut next year," said Harish Agarwal, a fixed income trader with First Rand Bank.

"I think the market will continue to trade flattish with a 8.50 to 8.75 percent range until the budget in early July," he added.

The benchmark 10-year bond yield closed up 5 basis points at 8.65 percent, after hitting 8.66 percent, its highest since June 3. The 5 bps rise on day, is the biggest single-day rise since May 16, when it rose by the same margin.

Traders will also continue to monitor the developments in Iraq and closely track global crude oil prices which have the potential to push up domestic inflationary pressures.

Brent crude rose towards $113 a barrel on Monday after a strong rally last week, as Sunni insurgents advanced in Iraq, intensifying concerns over a potential disruption to oil exports from the second-largest OPEC producer.

Traders also said some upward pressure on yields is likely due to the temporary tightness in cash conditions due to the advance tax outflows. Overnight cash rates closed at 8.75/8.80 percent, much above the repo rate of 8 percent.

In the overnight indexed swap market, the benchmark five-year swap rate closed up 5 basis points at 7.85 percent while the one-year rate ended 4 bps higher at 8.29 percent.