India's 10-year bonds dropped by the most in at least eight years after the central bank raised the main interest rate for the third time in less than two months to curb the fastest inflation in 13 years.
Benchmark yields climbed to the highest level in two weeks after the Reserve Bank of India raised the repurchase rate to a seven-year high of 9 per cent at its meeting on Tuesday. Sixteen of 22 economists surveyed by Bloomberg News predicted a quarter- percentage point increase.
``The rate increase is bigger than most bond traders anticipated and signals the central bank is more worried about inflation,'' said Navneet Munot, executive director in Mumbai at Morgan Stanley Investment Management. ``Yields must rise to catch up with the policy tightening measures.''
The yield on the 8.24 per cent note due April 2018 jumped 38 basis points to 9.45 percent as of 12:11 pm in Mumbai, according to the central bank's trading system. The price dropped 2.30 per 100 rupee face amount, to 92.40. A basis point is 0.01 percentage point.
The increase in yields is the biggest since Bloomberg started compiling data on the securities.
India's inflation rate has tripled this year. Wholesale prices climbed 11.89 per cent in the week ended July 12 from a year earlier, following an 11.91 per cent gain in the previous week, which was the most since February 1995, data provided by the commerce ministry show.
Higher interest rates are the ``obvious solution'' to rein in prices, Finance Secretary Duvvuri Subbarao said in an interview to Bloomberg Television on Monday.
The Reserve Bank lifted the repurchase rate twice in June. It last raised the rate on June 24 by a half-percentage point, the biggest increase since 2000.
``High and volatile crude oil prices pose a major risk to the global inflation outlook,'' the central bank said on Monday in its review of economic developments for the first quarter.