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India’s Bond Yields at One-Month Low as Inflation Decelerates

India’s benchmark bonds gained, pushing yields to their lowest level in a month, on speculation slowing inflation will create room for the central bank to cut interest rates.

Wholesale prices rose 6.62 percent in January, the slowest pace since November 2009, the commerce ministry said in a statement today. The median of 34 estimates in a Bloomberg News survey was 6.98 percent. The Reserve Bank of India last cut the repurchase rate by 25 basis points to 7.75 percent on Jan. 29, the first reduction in nine months.

“The signal WPI provides to the RBI is a positive one, which is likely to support a continuation of easing,” Cristian Maggio, a London-based analyst at TD Securities, said in a research note today. “With WPI inflation declining below 7 percent and sub-par growth, while the government pushes the reforms forward, we see the RBI reducing the repo rate by further 50 basis points this year and perhaps more if inflation proves more benign than we currently expect.”

The yield on the 8.15 percent notes due June 2022 fell three basis points, or 0.03 percentage point, to 7.82 percent in Mumbai, according to the central bank’s trading system.

Gross domestic product will rise 5 percent in the 12 months through March 2013, the Central Statistical Office predicted on Feb. 7, below last year’s 6.2 percent and the least since the 4 percent growth in 2002-2003.

As part of an economic-policy overhaul that started five months ago, India let oil firms raise retail diesel prices on Jan. 18 for the first time since September. The government also allowed industries such as retail and aviation to foreign investment.

Debt Purchase

The Reserve Bank of India will offer to buy as much as 100 billion rupees ($1.9 billion) of notes at an open-market auction tomorrow, it said in a statement on Feb. 12. The RBI has bought 1.2 trillion rupees of securities in the year that began April 1, up from 336 billion rupees a year earlier, according to data compiled by Bloomberg.

“The open-market operations have capped yields and the RBI is likely to infuse 300 billion rupees more by March by buying debt,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Mumbai.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell five basis points to 7.60 percent, 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: Amit Prakash at aprakash1@bloomberg.net

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