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Indian Bonds Drop as Yield Near Three-Year Low Deters Investors

India’s benchmark bonds declined on speculation yields near the lowest level in three years will deter buyers.

The 10-year yield dropped 30 basis points so far in May, set for the biggest decline in 11 months, as the slowest inflation since 2009 spurred speculation of further interest-rate cuts. The Reserve Bank of India, which has lowered the repurchase rate by 75 basis points to 7.25 percent this year, is scheduled to review policy next on June 17.

“Bonds have dropped slightly as there could be some profit taking by investors after a big rally this month,” said Paresh Nayar, head of money-markets and currency at FirstRand Ltd. in Mumbai. “The overall view for bonds remains bullish given the lower inflation trajectory and increasing possibilities of rate cuts.”

The yield on the 8.15 percent notes due June 2022 rose two basis points, or 0.02 percentage point, to 7.43 percent as of 9:58 a.m. in Mumbai, according to the central bank’s trading system. The rate touched 7.40 percent on May 16, the lowest level for a benchmark 10-year bond since May 2010.

The wholesale-price index rose 4.89 percent from a year earlier in April, the smallest increase in 41 months, and RBI Governor Duvvuri Subbarao said the data will be factored into decisions at the next meeting.

“We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy,” Subbarao said in Frankfurt on May 14.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose one basis point to 7.12 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: James Regan at jregan19@bloomberg.net

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