India’s Bonds Gain Most in Two Weeks as Inflation at 8-Month Low

India’s bonds advanced the most in two weeks on optimism the central bank has more room to ease monetary policy after the inflation rate dropped to an eight- month low.

The wholesale-price index rose 7.45 percent last month from a year earlier after climbing 7.81 percent in September, the Commerce Ministry said yesterday. That’s the slowest pace since February and compares with the 7.9 percent median estimate of 28 economists in a Bloomberg News survey. The Reserve Bank of India has kept the repurchase rate unchanged at 8 percent in the last four policy meetings.

“Slowing inflation has created more room for the RBI to cut rates,” said R.S. Chauhan, Mumbai-based chief dealer of fixed-income and currencies at State Bank of Bikaner & Jaipur. (SBBJ) “We can expect some easing in the start of the new year.”

The yield on the benchmark 8.15 percent government bonds due June 2022 dropped two basis points, or 0.02 percentage points, to 8.19 percent in Mumbai, according to the central bank’s trading system. That’s the biggest decline since Nov. 1.

At the RBI’s last policy review on Oct. 30, Governor Duvvuri Subbarao said he sees a “reasonable likelihood” of monetary easing in the first quarter of 2013.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell five 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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