Indian 10-Year Bond Yields at Seven-Week Low as Inflation Eases

Indian bond yields were at a seven- week low on optimism easing inflation will create room for the central bank to relax monetary policy.

The wholesale-price index rose 7.24 percent in November from a year earlier, compared with a 7.45 percent jump in October and the median estimate in a Bloomberg survey of 7.6 percent, official data showed last week. The monetary authority, which last lowered the repurchase rate by 50 basis points to 8 percent in April, reviews policy again tomorrow.

“Purely going by the inflation number, there is probably a case for a rate cut but it will be a close call,” said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. in Mumbai. “The underlying stance is going to be dovish.” Investors have built up some expectations for policy easing ahead, she added.

The yield on the 8.15 percent notes due June 2022 was at 8.142 percent in Mumbai, according to the central bank’s trading system, the lowest level since Oct. 29. India’s government debt has returned 10 percent this year, second only to Indonesia among 10 Asian indexes compiled by HSBC Holdings Plc.

The Reserve Bank of India will reduce the cash-reserve ratio by 25 basis points to 4 percent, according to 19 of 23 economists in a separate survey, with one seeing a 50 basis point cut and the rest no change. The central bank will hold the benchmark borrowing rate at 8 percent, according to 24 of 25 analysts surveyed by Bloomberg, while one predicted a 50 basis point cut.

Bond Purchases

“While a CRR reduction is possible, the resumption of open-market bond purchases could be an argument against it,” said Iyer.

The RBI resumed debt buybacks this month after a five-month hiatus to boost cash supplies and revive the economy. The central bank bought 1.1 trillion rupees ($20 billion) of government securities this fiscal year that started April 1.

Asia’s third-largest economy will expand about 5.7 percent to 5.9 percent in the fiscal year through March, the Finance Ministry said today, less than an earlier forecast of as much as 7.85 percent. That would be the slowest pace in a decade and is in line with the central bank’s Oct. 30 estimate of 5.8 percent. At the last review, RBI Governor Duvvuri Subbarao signaled he may ease policy in the January-to-March quarter.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.63 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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