By V. Ramakrishnan March 15 (Bloomberg) -- Yields on India’s benchmark 10-year bonds were near their highest level in almost 17 months as accelerating inflation cooled demand for fixed-income assets. The nation’s wholesale price index climbed 9.89 percent from a year earlier in February, the biggest increase since October 2008, according to government data published today in New Delhi. Industrial output grew 16.7 percent in January after expanding 17.6 percent the previous month, the most since at least 1994, according to data published March 12. “There is unanimity in the market strong data in both the industrial output and inflation may prompt the central bank to raise interest rates,” said Dhawal Dalal, head of fixed income at DSP Blackrock in Mumbai. “To a certain extent, rate increases are priced in at these levels.” The yield on the 6.35 percent note due January 2020 was unchanged at 8.00 percent as of 3:14 p.m. in Mumbai, according to the central bank’s trading system. The price was at 88.89 per 100 rupee face amount. The yield touched 8.02 percent on March 9, the highest level since October 2008. Dalal predicted the central bank will increase its benchmark interest rate by as much as half a percentage point at its April 20 policy review and forecast the 10-year bond yield will peak at 8.35 percent in May or June. Inflation may accelerate to double digits, stoked by higher food prices, Reserve Bank of India Governor Subir Gokarn said March 11, adding that it won’t “persist” at that level. The central bank has kept the benchmark reverse repurchase rate at a record-low 3.25 percent since April. Policy makers in January raised the proportion of deposits lenders need to keep as reserves to 5.75 percent from 5 percent. Trading in debt securities and foreign exchange will be suspended in Mumbai tomorrow for a local holiday. Record Borrowing Dalal said investors are also waiting for the government bond auction calendar for the fiscal year beginning April 1. The government may borrow more in the first half as almost 75 percent of debt maturing in the year will be repaid during the period, he said. Finance Minister Pranab Mukherjee, unveiling his budget on Feb. 26, said the government will borrow a record 4.57 trillion rupees ($100.1 billion) in the next fiscal year. India’s central bank will conduct the government’s borrowing program for the next financial year starting April 1 in a “non-disruptive” manner, Deputy Governor Shyamala Gopinath told Bloomberg-UTV television channel. ‘Tight’ Liqudity The central bank absorbed 42.30 billion rupees through its reverse repurchase auction today, the least since July 2008. “Liquidity is tight because corporates are paying advance tax, but I expect conditions to improve in a week when the government starts spending the cash received,” said Srinivasa Raghavan, head of treasury at IDBI Gilts in Mumbai. Raghavan estimated that Indian companies will pay up to 600 billion rupees in corporate tax in the first three months of this year. The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, decreased. The rate, a fixed payment made to receive floating rates, was at 7.04 percent compared with 7.06 percent on March 12. To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

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