Government Bonds Advance as Inflation Slows More Than Economists Estimated

India’s bonds gained as a government report showed inflation slowed more than economists estimated, increasing room for the central bank to cut borrowing costs.

Yields on 10-year notes dropped to the lowest level in more than a week as data showed the pace of wholesale-price increases cooled to 6.55 percent in January, the least since November 2009 and slower than the 6.7 percent median estimate in a Bloomberg News survey. Bonds also advanced on speculation the Reserve Bank of India will buy debt in open-market auctions and lower reserve requirements for banks a second time this year to ease a cash shortage.

“Tight banking-system liquidity will likely increase market expectations of both open-market purchases in the near term and a reserve-ratio cut,” analysts at Barclays Capital including Singapore-based Kumar Rachapudi wrote in a note to clients published today. Slower-than-expected inflation will “increase the chances of a repo rate cut in March,” the analysts wrote.

The yield on the 8.79 percent note due November 2021 fell three basis points, or 0.03 percentage point, to 8.18 percent in Mumbai, according to the central bank’s trading system. That is the lowest level since Feb. 3.

The Reserve Bank cut the reserve ratio for banks last month for the first time since 2009 to free up 320 billion rupees ($6.5 billion) in the banking system, and said that the bias of future rate decisions “will be toward lowering them.” Governor Duvvuri Subbarao boosted the benchmark repurchase rate 13 times in the past two years to cool inflation.

Indian banks borrowed an average 1.33 trillion rupees a day from the central bank to meet shortages in the past month, according to data from the central bank.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, decreased seven basis points to 8.05 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

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

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