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Indian Bonds Complete Weekly Drop as RBI Sees No Easing Scope

India’s bonds completed a weekly decline after central bank Governor Duvvuri Subbarao said inflation limited room for policy easing to spur growth.

The nation’s benchmark price index rose 6.87 percent in July from a year earlier, a government report on Aug. 14 showed, the fastest pace among the largest emerging markets. Consumer prices rose 5.2 percent in Brazil, 1.8 percent in China and 5.6 percent in Russia last month, according to official figures. Subbarao left the repurchase rate unchanged at 8 percent on July 31. The monetary authority will next review borrowing costs on Oct. 30.

“Stubborn inflation has reduced the possibility of rate cuts in the near future,” said Krishnamurthy Harihar, a Mumbai- based treasurer at the local unit of FirstRand Ltd. (FSR), South Africa’s second-largest banking group. “That will be a negative for the bond market.”

The yield on the 8.15 percent notes due June 2022 rose seven basis points, or 0.07 percentage point, this week to 8.24 percent in Mumbai, according to the central bank’s trading system. The rate fell three basis points today.

The Reserve Bank of India raised its inflation estimate for the fiscal year through March 2013 to 7 percent from 6.5 percent on July 31. Sudipto Mundle, a member of the bank’s technical advisory committee, said in an interview yesterday that the RBI shouldn’t shift “its focus from inflation.”

“There is just no space for fiscal or monetary response,” Subbarao said in a speech on Aug. 13.

India must damp inflation, allow more foreign investment to boost growth and raise diesel prices to contain subsidies that have fanned a budget deficit, Prime Minister Manmohan Singh’s economic panel said today.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, climbed seven basis points this week to 7.81 percent, according to data compiled by Bloomberg. The rate fell two basis points today.

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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