Indian Bond Yields Fall to Two-Week Low on Rate-Cut Speculation

India’s 10-year bonds gained for a second day, pushing yields to the lowest level in two weeks, on speculation the central bank will cut interest rates to support the nation’s slowing economy (INQGGDPY).

Rates on the notes fell 17 basis points in December, the most since May 2010, as government data showed factory output shrank 5.1 percent in October from a year earlier in the first contraction since June 2009. The Reserve Bank of India, which boosted borrowing costs 13 times since the start of 2010 to cool inflation, sees a “reversal” in its policy in 2012, the British Broadcasting Corp. reported yesterday, citing Governor Duvvuri Subbarao.

“Investors expect a turn in the tightening cycle soon,” said R.S. Chauhan, chief dealer of treasury in Mumbai at State Bank of Bikaner & Jaipur. “That is pushing bond yields down.”

The yield on the 8.79 percent notes due November 2021 fell six basis points, or 0.06 percentage point, to 8.33 percent as of 10:36 a.m. in Mumbai, according to the central bank’s trading system. That is the lowest level since Dec. 20. The rate, which slid 19 basis points yesterday, is headed for the biggest two- day decline since May 2010.

State Bank’s Chauhan predicted the central bank will cut the repurchase rate, currently at 8.5 percent, by 25 basis points at its policy review on Jan. 24. The inflation (INFINFY) rate dropped to 9.11 percent in November, the lowest level in a year.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, dropped one basis point to 7.71 percent, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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