Indian Bond Yields Drop to This Quarter’s Low as Output Shrinks

India’s 10-year bonds gained for a second day after factory output shrank for the first time in more than two years, adding pressure on the central bank to loosen monetary policy.

Yields on the most-traded debt due 2021 declined to this quarter’s lowest level after government data yesterday showed that factory output fell 5.1 percent in October from a year earlier, the first contraction since June 2009. The Reserve Bank of India, which boosted its repurchase rate 13 times since the start of 2010 to cool inflation, is scheduled to review its policy on Dec. 16.

“The bond rally may continue as monetary easing is around the corner,” said Roy Paul, a Mumbai-based deputy general manager at Federal Bank Ltd. “Growth is faltering and inflation worries are also waning.”

The yield on the 8.79 percent bonds due November 2021 fell two basis points, or 0.02 percentage point, to 8.42 percent as of 9:37 a.m. in Mumbai, according to the central bank’s trading system. That’s the lowest level for a benchmark 10-year note since September, according to data compiled by Bloomberg.

Inflation probably slowed to 9.04 percent in November from 9.73 percent the previous month, according to the median of estimates in a Bloomberg News survey before the data is published tomorrow.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell four basis points to 7.75 percent, according to data compiled by Bloomberg. The rate fell to a three-month low of 7.73 percent earlier.

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