India’s Bond Yield at One-Week Low on Rate-Cut Speculation

India’s bond yield held at the lowest level in a week as easing inflation and slowing economic growth spurred speculation the central bank will add to three interest-rate cuts this year.

Gross domestic product climbed a decade-low 5 percent in the 12 months ended March, below the 10-year average of about 8 percent, official data showed last week. Reserve Bank of India Governor Duvvuri Subbarao said May 14 that inflation at a 41-month low of 4.89 percent in April would be taken into consideration at the next monetary policy review.

“Sovereign bond yields have eased sharply in anticipation of easier monetary policy and lower inflation,” said Gaurav Kapur, a senior economist at Royal Bank of Scotland Group Plc in Mumbai. “While the RBI may not reduce rates on the 17th of June in its mid-quarter review of monetary policy, it is likely to guide that the room for policy rate cuts can increase.”

The yield on the 8.15 percent government securities due June 2022 was little changed at 7.39 percent as of 9:50 a.m. in Mumbai, according to the central bank’s trading system. The rate was at the lowest level since May 28 and has declined six basis points this week.

Subbarao reduced the repurchase rate in January, March and May by a combined 75 basis points to 7.25 percent.

The RBI will buy as much as 70 billion rupees ($1.2 billion) of government notes on June 7, it said in a statement on June 3. The cash reserve ratio, or the proportion of reserves that banks should set aside, was last cut by 25 basis points to 4 percent in February.

RBI Purchases

“Indications from the RBI, that it prefers open-market purchases of bonds to inject liquidity into the banking system, rather than a CRR cut has also been positive for sovereign bonds,” said Kapur of RBS.

In the fiscal year that ended March 31, the central bank added 1.6 trillion rupees to the financial system through open-market debt purchases, RBI data show.

The one-year interest-rate swap, a derivatives contract used to guard against fluctuations in funding costs, rose one basis point to 7.16 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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