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Indian Bond Yields at 5-Month Low; Rupee Completes Monthly Loss

India’s 10-year bond yield fell to a five-month low on optimism the central bank will ease monetary policy in 2013 to revive economic growth.

The Reserve Bank of India will lower the repurchase rate by 50 basis points to 7.5 percent next quarter, the first reduction since April, according to 11 of 20 analysts surveyed by Bloomberg. Inflation averaged 7.6 percent this year, compared with 9.5 percent in 2011. The rupee completed a third monthly decline. The current-account deficit widened to a record $22.3 billion in the three-months through September, according to an RBI statement published after market hours.

“Growth is a concern and expectations for a rate cut are quite legitimate given that headline inflation is coming lower,” said Lakshmi Iyer, Mumbai-based head of fixed income at Kotak Mahindra Asset Management Co. overseeing the equivalent of $5.6 billion.

The yield on the 8.15 percent notes due June 2022 dropped six basis points, or 0.06 percentage point, to 8.05 percent as of in Mumbai, according to the central bank’s trading system. That’s the lowest level since July 16. The rate fell 13 basis points this month and 52 basis points in 2012.

Seven economists see a 25 basis point reduction in the repo rate. One expects no change while Woori CBV Securities Corp. forecasts a 25 basis point increase. The next review is Jan. 29.

Yield ‘Milestone’

“The next milestone for the 10-year bond yield is 8 percent and even that could be breached if the magnitude of a rate cut next month is more than 25 basis points,” Iyer said as she predicted such a move.

The rupee fell 0.4 percent today, the most in more than a week, to 54.9950 per dollar in Mumbai, according to data compiled by Bloomberg. It declined 1.4 percent in December, taking this year’s loss to 3.5 percent, second only to Indonesia’s rupiah among Asia’s 10 most-used currencies excluding the yen.

One-month implied volatility in the rupee, a gauge of expected moves in exchange rates used to price options, rose 10 basis points to 10.10 percent. The measure decreased 190 basis points in 2012.

Three-month onshore forwards traded at 55.68, compared with 55.74 at the end of last week, data compiled by Bloomberg show. Offshore non-deliverable contracts were at 55.71 versus 55.70. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

Inflation Outlook

Asia’s third-largest economy expanded 5.3 percent in the three months through September, matching the first-quarter growth rate that was the lowest in three years.

At a policy review on Dec. 18 the RBI signaled it will cut interest rates in the coming months, after holding the repurchase rate at 8 percent for a fifth meeting.

Wholesale-price increases will average 7.7 percent this quarter and 7.2 percent in the first three months of 2013, according to the median estimate of economists surveyed Bloomberg in December.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the Reserve Bank said in a statement on Dec. 18.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points today to 7.61 percent, data compiled by Bloomberg show. The contract was at 7.75 percent at the end of 2011.

The overnight interbank borrowing rate rose 90 basis points to 9 percent, the highest level since March, as lenders borrowed 1.565 trillion rupees ($28.5 billion) from the central bank’s repo window 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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