India’s Bond Yields Near 30-Month Low on Rate-Cut Speculation

India’s bond yields were near a 30- month low on speculation slowing inflation will give the central bank room to reduce interest rates as early as next week.

Fifteen of 18 analysts in a Bloomberg survey predict the Reserve Bank of India will cut its repurchase rate by 25 basis points to 7.75 percent on Jan. 29, while two forecast a 50 basis point reduction and one sees no change. Finance Minister Palaniappan Chidambaram said in an interview yesterday he would like borrowing costs to ease to help spur growth. Fiscal prudence will be a key part of next month’s budget, he said, reiterating a goal of 4.8 percent of gross domestic product for the government’s deficit in the year through March 2014.

“The RBI is clearly teed up for rate cuts, banking on an easing of inflation in coming quarters, fiscal consolidation commencing, and structural reform implementation continuing,” HSBC Holdings Plc economists including Singapore-based Leif Eskesen wrote in a research note today. “But it is likely to tread carefully, given lingering inflation risks, limiting the possible policy rate cut to 25 basis points.”

The yield on the 8.15 percent bonds due June 2022 was at 7.86 percent as of 10:17 a.m. in Mumbai, according to the central bank’s trading system. It touched 7.83 percent earlier, approaching the lowest level since July 2010 of 7.8 percent reached on Jan. 14. The yield has dropped 19 basis points this month, headed for the biggest decline since May.

The RBI’s repo rate was last lowered by half a percentage point in April. The wholesale-price index used to measure inflation rose 7.18 percent in December from a year earlier, the smallest increase since 2009, government data showed last week. Chidambaram said in Singapore today that a 7 percent inflation rate was “unacceptable.”

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose two basis points to 7.55 percent in Mumbai, according to data compiled by Bloomberg.

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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