Indian Yields at 3-Week High After RBI Signals Rate-Cut Limit

Indian bonds fell, sending yields to a three-week high, after the central bank signaled elevated inflation gives limited room to cut interest rates, even amid a commitment to revive economic growth.

Inflation of 7.18 percent is still the fastest in major emerging markets after slowing to a three-year low in December. “The scope for supportive monetary policy action is constrained,” the Reserve Bank of India said in a report yesterday. Thirty of 35 analysts surveyed by Bloomberg forecast Governor Duvvuri Subbarao will reduce the repurchase rate by 25 basis points to 7.75 percent today, while four expect a 50 basis point cut and one sees no change.

“The RBI’s policy preview is less dovish than we expected,” Goldman Sachs economist Tushar Poddar wrote in a research note today. “It increases risks of a 25 basis point cut in the repo instead of our expectation of a front-loaded 50 basis points cut.”

The yield on the 8.15 percent bonds due June 2022 rose two basis points, or 0.02 percentage point, to 7.89 percent as of 9:45 a.m. in Mumbai, according to the central bank’s trading system. That is the highest level since Jan. 9.

Finance Minister Palaniappan Chidambaram said last week he wanted interest rates to moderate to spur growth in Asia’s third-largest economy. Gross domestic product will rise as little as 5.7 percent in the year through March, the government said Dec. 17. That would be the slowest pace since 2003.

Prime Minister Manmohan Singh’s administration has taken a series of measures since mid-September, including allowing more international investment in retailing and aviation. India on Jan. 17 partially freed diesel prices from state control to curb fuel subsidies.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points to 7.59 percent in Mumbai, according to data compiled by Bloomberg.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at

To contact the editor responsible for this story: James Regan at

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