Indian Swaps Decline for Fifth Week as RBI Forecast to Cut Rates

India’s one-year interest-rate swaps headed for a fifth weekly decline on speculation cooling inflation will give the central bank room to cut interest rates.

Eighteen of 22 analysts in a Bloomberg News survey predict the Reserve Bank of India will reduce its repurchase rate by 25 basis points to 7.25 percent at a review on May 3, while three forecast no change. One expects a 50 basis point cut. Wholesale (INFINFY) prices rose 5.96 percent in March from a year earlier, the slowest pace since November 2009, official data show.

“Softening inflation will give the central bank comfort to cut rates,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. (YES) “Moderation in gold and oil prices will further ease inflation and diminish concerns about the current-account deficit. That will give the RBI room to follow up with another rate cut after May 3.”

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell four basis points, or 0.04 percentage point, this week to 7.23 percent as of 9:32 a.m. in Mumbai, according to the central bank’s trading system. It fell one basis point today. The fixed cost to lock in interest rates for a year touched 7.21 percent on April 23, the lowest level since January 2011.

Reserve Bank Governor Duvvuri Subbarao cut the repo rate by 50 basis points in the first quarter to help revive Asia’s third-largest economy. The nation’s gross domestic product rose 5 percent in the fiscal year ended March 31, the weakest pace since 2003, the statistics agency estimates.

Oil, Gold

Brent crude oil has declined 6.4 percent this month, while gold lost almost 8 percent. India is the world’s top bullion buyer and fourth-largest oil consumer, with imports contributing to a record $32.6 billion current-account deficit in the last quarter of 2012.

Easing inflation “increases the probability of a more accommodative monetary policy,” Raghuram Rajan, the top adviser in the Finance Ministry, said in an April 16 interview.

Government bonds gained this week. The yield on the benchmark 8.15 percent notes due June 2022 fell two basis points this week and one basis point today to 7.76 percent, according to the central bank’s trading system.

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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