India’s Bonds Gain on Speculation RBI Will Cut Rates Next Week

India’s bonds advanced on optimism the central bank will cut interest rates next week to revive economic growth, which the government forecasts will slow to the least in a decade this financial year.

Fifteen of 18 analysts surveyed by Bloomberg predict policy makers will lower the repurchase rate by 25 basis points to 7.75 percent on Jan. 29, while two see a 50 basis point reduction and one no change. Inflation of 7 percent is “unacceptable,” Finance Minister Palaniappan Chidambaram said in Singapore yesterday. Gross domestic product will increase by as little as 5.7 percent in the 12 months through March, the government said in a mid-year review to Parliament on Dec. 17. That would be the slowest pace since 2003.

“The monetary authority may cut rates by 25 basis points,” said Harihar Krishnamoorthy, Mumbai-based treasurer at the Indian unit of FirstRand Ltd. (FSR), South Africa’s second-largest financial services provider. “But with inflation still at elevated levels, the central bank may temper expectations for further rate cuts.”

The yield on the 8.15 percent bonds maturing in June 2022 fell one basis points, or 0.01 percentage point, to 7.86 percent as of 9:26 a.m. in Mumbai, according to the central bank’s trading system. The rate has dropped 19 basis points this year.

The repo rate was last lowered by half a percentage point in April. The wholesale-price index, the benchmark inflation measure, rose 7.18 percent in December from a year earlier, the smallest increase since 2009, government data showed last week.

The Reserve Bank of India considers an inflation rate of between 4 percent and 5 percent as a comfortable level, Deputy Governor K.C. Chakrabarty said on Nov. 15.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.56 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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