India’s Bonds Drop Most in Three Months as Rates Kept Unchanged

India’s 10-year bonds declined the most in three months as the central bank kept the repurchase rate unchanged for a fourth policy meeting today.

Fourteen of the 33 economists in a Bloomberg survey had predicted the Reserve Bank of India will cut the repurchase rate from 8 percent, while the rest expected it to be unchanged. The central bank cut the cash reserve ratio to the lowest level in 36 years to boost funds in the banking system and counter an economic slowdown. Some investors believe the reserve requirement cut may delay debt purchases by the central bank, according to N.S. Venkatesh, head of treasury at IDBI Bank Ltd. (IDBI)

“The lack of a rate cut has disappointed some investors, who had taken long positions before the review,” said Mumbai- based Venkatesh. “Demand may also fall if the RBI puts off buying debt.”

The yield on the benchmark 8.15 percent bonds due June 2022 rose five basis points, or 0.05 percentage point, to 8.18 percent in Mumbai, according to the central bank’s trading system.

RBI Governor Duvvuri Subbarao last cut the repurchase rate by 50 basis points in April (APR) after raising the rate by a record 375 basis points, or 3.75 percentage points, from March 2010 through October 2011 to tame inflation that has averaged 8.6 percent in the past three years.

The cash reserve ratio was reduced by 25 basis points today to 4.25 percent. Twenty three of 33 economists in the Bloomberg survey had predicted the cut.

Venkatesh forecast the central bank will purchase as much as 700 billion rupees ($13 billion) of notes in the remainder of the fiscal year ending March.

Quarterly expansion in Asia’s third-largest economy averaged 5.4 percent in the first half of 2012, compared with 7.5 percent in the whole of 2011.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose 14 basis points to 7.72 percent, data compiled by Bloomberg show.

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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