Government Bonds Little Changed Before Governor Subbarao's Rate Meeting

India’s bonds were little changed, with benchmark yields near a 17-month high, before a central bank policy meeting tomorrow as economists predicted Governor Duvvuri Subbarao will raise interest rates to damp inflation.

The Reserve Bank of India, in a report published today, said “elevated” levels of inflation remain a concern in the immediate term. While the median forecast in a Bloomberg News survey of 30 economists is for a quarter-point rise in interest rates, a third of those respondents say the increase could be as much as 50 basis points.

“Another round of interest rate increases looks certain so investors have squared their positions before the policy,” said Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. Verma predicts the central bank may increase the key policy rates by 25 basis points each. The central bank may leave the cash reserve ratio, the proportion of deposits lenders must hold as reserves, unchanged, he said.

The yield on the 6.35 percent note due January 2020 was 8.08 percent as of the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price was at 88.52 per 100 rupee face amount. The yield reached 8.13 percent on April 15, the highest level since Oct. 3, 2008.

Anchoring Expectations

“It is likely that the growth impulses could further strengthen during 2010-11, and therefore, anchoring inflationary expectations without hurting the growth process continue to be the focus of monetary policy,” the central bank said in the report.

Consumer prices paid by industrial workers in India rose 14.9 percent in February from a year earlier as the economy expanded. The nation’s benchmark wholesale-price inflation rate held at a 17-month high of 9.9 percent in March.

Earlier, 10-year bonds advanced on speculation the highest yields in 17 months attracted investors.

The central bank raised interest rates last month for the first time since July 2008, increasing the reverse-repurchase rate to 3.5 percent from a record-low 3.25 percent. It also increased the repurchase rate, at which the central bank lends to commercial banks, to 5 percent.

The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, fell. The rate, a fixed payment made to receive floating rates, was 6.99 percent, compared with 7.02 percent on April 16.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

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