Indian sovereign bonds fell after the central bank said the room to cut borrowing costs this year to support economic growth is limited because of inflation and a record current-account deficit. The rupee weakened.
“Monetary policy would need to be calibrated recognizing the very limited policy space available to ease further,” the Reserve Bank of India said yesterday in an economic review before today’s rate decision in Mumbai. The RBI will lower its repurchase rate to 7.25 percent from 7.5 percent, according to 33 of 40 economists in a Bloomberg survey. Six see no change and one predicts a cut to 7 percent.
The yield on the 8.15 percent securities due June 2022 rose four basis points, or 0.04 percentage point, to 7.77 percent as of 10:39 a.m. in Mumbai, according to the central bank’s trading system. That is the biggest increase since March 26. The yield touched 7.68 percent yesterday, the lowest level for a benchmark 10-year note since July 2010, and has risen three basis points this week.
“Yields have definitely reacted to the RBI’s comments yesterday,” said Harihar Krishnamoorthy, Mumbai-based treasurer at FirstRand Ltd. (FSR) He said he sees one more 25 basis point cut in the fiscal year through March 2014 after today if consumer-price inflation eases and the budget deficit is reined in to within 4.8 percent of gross domestic product as planned.
The RBI statement cited “significant” risks, including a “high” current-account gap and “inflation above the threshold over which it becomes inimical to growth sustainability.”
The rupee declined 0.3 percent to 53.965 per dollar, according to data compiled by Bloomberg. It touched 53.6650 yesterday, the strongest since Feb. 28, and has gained 0.8 percent this week. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 15 basis points, or 0.15 percentage point, from yesterday to 8.95 percent.
India will auction 150 billion rupees ($2.8 billion) of bonds maturing in 2018, 2026, 2030 and 2041 today.
The European Central Bank yesterday cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession. ECB President Mario Draghi signaled another reduction is possible. U.S. Federal Reserve officials raised the prospect of increasing the monthly pace of bond buying above $85 billion to guard against any slump in growth or employment.
Three-month onshore rupee forwards traded at 54.92 per dollar, compared with 54.81 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.58 versus 54.41. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
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