India’s benchmark bonds advanced the most in two weeks on optimism slowing economic growth and the government’s success in fiscal consolidation will prompt the central bank to reduce interest rates.
Asia’s third-largest economy grew 4.5 percent in the three months ended Dec. 31 from a year earlier, the weakest pace in almost four years, a government statement showed yesterday. Finance Minister Palaniappan Chidambaram, in his budget speech the same day, said the fiscal deficit will be reduced to 4.8 percent of gross domestic product in the 12 months starting April 1. The shortfall will be contained at 5.2 percent this year, compared with a target of 5.3 percent, he said.
“The government’s adherence to the deficit ratio and a weakening economy is likely to result in an interest-rate cut,” said Shubhada Rao, the Mumbai-based chief economist at Yes Bank Ltd. (YES) in Mumbai. “There is serious effort by the finance minister at fiscal consolidation, and one has to go with the intent at the moment.”
The yield on the 8.15 percent notes due June 2022 fell two basis points, or 0.02 percentage point, to 7.85 percent as of 9:40 a.m. in Mumbai, according to the central bank’s trading system. The rate rose five basis points this week.
The yield jumped the most in seven months yesterday as Chidambaram projected gross market borrowing for the fiscal year through March 2014 at a record 6.29 trillion rupees ($115 billion), compared with 5.8 trillion estimated in a Bloomberg survey.
“Yesterday’s price movement was probably a knee-jerk reaction and the gross borrowing target factors in a buyback of 500 billion rupees of bonds as well,” Yes Bank’s Rao said. She predicts the benchmark yield may drop to 7.75 percent if the central bank cuts rates this month.
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. Monetary policy will be reviewed on March 19.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis point to 7.61 percent, according to data compiled by Bloomberg.
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