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By Bloomberg

India’s 10-year sovereign bonds posted their biggest monthly decline in almost two years as the prospect of inadequate monsoon rains clouded the outlook for inflation and interest rates.

The weather department forecast the June-September showers to be 88 percent of a 50-year average this year, spurring concern that potential damage to crops will boost food costs, which account for about 50 percent of the consumer-price basket. Reserve Bank of India Governor Raghuram Rajan linked further policy action to the strength of the seasonal rains as he cut borrowing costs for a third time this year on June 2. The rupee completed its first monthly advance since February.

The yield on the notes due May 2025 climbed 22 basis in June to 7.86 percent in Mumbai, according to prices from the RBI’s trading system. That’s the biggest increase for benchmark 10-year debt since August 2013. The yield fell three basis points on Tuesday.

“The uncertainty over monsoon and the RBI’s cautious tone have diminished the possibility of a rate cut,” said Soumyajit Niyogi, a Mumbai-based interest-rate analyst at primary dealer SBI DFHI Ltd. “We are also now living in times of increased global volatility and local bonds are reflecting it.”

Investors have had to grapple with increased volatility as the crisis in Greece poses a contagion risk for emerging markets. The European nation has imposed capital controls and shut banks to avert the collapse of its financial system. Fifty- day swings in India’s 10-year government notes have widened to 9.85 percent from 8.53 percent at the end of May.

Consumer-price gains quickened to 5.01 percent in May from this year’s low of 4.87 percent in April. The monsoon rains account for more than 70 percent of the annual precipitation.

Rupee Performance

The rupee rose 0.3 percent in June and on Tuesday to 63.6525 a dollar, according to prices from local banks compiled by Bloomberg. Still, the currency has retreated 1.8 percent since the end of March, its fourth drop in the past five quarters.

A slump in Indian exports, the prospect of an increase in U.S. interest rates this year and the central bank’s accumulation of foreign-exchange reserves continue to weigh on the currency, said Rohan Lasrado, the Mumbai-based head of foreign-exchange trading at RBL Bank Ltd.

Governor Rajan has boosted India’s reserves to a record $355 billion since taking office in September 2013. The nation’s exports fell for a sixth straight month in May, the longest run of declines since 2009.