By V. Ramakrishnan Dec.31 (Bloomberg) -- Indian bonds were set to complete their worst year in at least a decade amid speculation the central bank will raise interest rates to keep inflation in check as food costs surge. The government’s plan to borrow a record 4.51 trillion rupees ($96.7) in the fiscal year ending March 31 to stimulate the economy pressured bonds lower this year. The yield on the benchmark 10-year note increased 2.4 percentage points, the biggest gain since at least 1999, according to data compiled by Bloomberg. “There is a potential for yields to move upwards by 50 basis points sometime next year as we are likely to see many interest-rate increases,” said Krish Ramkumar, who manages the equivalent of $1 billion of Indian debt at Sundaram BNP Paribas Asset Management Co. in Mumbai. “Come March, the market will start worrying about the future fiscal deficit, which is likely to be only marginally lower than the current year’s level.” The yield on the most-traded 6.90 percent bond due July 2019 slipped three basis points to 7.66 percent as of 9:52 a.m. in Mumbai, according to the central bank’s trading system. The price rose 0.15, or 15 paise per 100 rupee face amount, to 94.90. A basis point is 0.01 percentage point. India’s budget deficit is forecast at 6.8 percent of gross domestic product in the 12 months through March 2010, the most in 16 years. Such a high deficit can’t be sustained for a long time and the nation has to strike a balance between the economy’s needs and its ability to bear the shortfall, Finance Minister Pranab Mukherjee said yesterday. Worst Performers Indian bonds are the worst performers in 2009 among 10 Asian local-currency debt indexes compiled by HSBC Holdings Plc, slumping 5 percent. Wholesale food prices increased 18.65 percent from a year earlier in the week ended Dec. 12, following a 19.95 percent increase the previous week that marked the steepest climb in 11 years. Reserve Bank of India Deputy Governor Shyamala Gopinath said on Dec. 29 rising food prices may spillover to the broader economy and future policy actions will be dictated by evolving inflation and growth conditions. The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose one basis point to 6.92 percent. To contact the reporter on this story: V.Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net.

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