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Ten-Year Bonds Set for Second Straight Weekly Drop on Inflation Concerns
India’s 10-year bonds rose the most in three weeks after central bank Governor Duvvuri Subbarao said there is evidence inflationary pressures are easing, signaling that the pace of rate increases will be tempered.
Yields fell for a second day as primary dealers bought 13.9 billion rupees ($296 million) of the 10-year notes out of the 40 billion rupees offered by the government at auctions today. The government also sold 50 billion rupees of 5-year notes and 30 billion rupees of 17-year paper. The Reserve Bank of India, which has increased rates four times this year, will review its policy next on Sept. 16.
“Investors perceived the comments from the central bank as positive for bonds,” said Mukesh Kumar, a fixed-income trader at State Bank of Bikaner & Jaipur in Mumbai. “The devolvement of bonds on primary dealers was seen as a sign from the Reserve Bank that they won’t like yields to rise too fast.”
The yield on the 7.80 percent bond due in May 2020 fell six basis points to 7.97 percent as of the 5:00 p.m. close in Mumbai, according to the central bank’s trading system. The price rose 0.37, or 37 paise per 100 rupee face amount, to 98.83. The yield touched 8.07 percent on Aug. 25, the highest level in more than three months.
Bond yields have climbed 25 basis points since the central bank raised its policy rates on July 27. The reverse-repurchase rate, at which it drains cash from banks, is at 4.5 percent, while the repurchase rate, which it charges on overnight loans, is at 5.75 percent.
Output Data
Last month, the Reserve Bank raised its forecast for wholesale-price inflation at the end of March 2011 to 6 percent from 5.5 percent. The rate was 9.97 percent in July after holding above 10 percent in the previous five months.
The statistics office will publish India’s gross domestic product data for the quarter through June on Aug. 31. Economic output expanded 8.8 percent during the second quarter from a year earlier, compared with 8.6 percent in the previous quarter, according to the median estimate in a Bloomberg News survey of 24 economists.
Subbarao said in a speech today that the central bank has to balance, inflation and stability.
“Going forward, the Reserve Bank will calibrate policy action to the evolving growth-inflation dynamics,” Subbarao said in Bangalore, India. “Given the uncertainty in the world and the lags in monetary transmission, it is not possible to offer more precise guidance.”
The cost of one-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, fell to 6.11 percent from 6.16 percent yesterday.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
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