Indian Bonds Snap Three-Day Advance Before RBI Policy Meeting

India’s 10-year bonds dropped, snapping a three-day gain, ahead of a central bank meeting to set interest rates today.

The Reserve Bank of India will maintain its key repurchase rate at 7.25 percent after lowering it three times this year, according to 31 of 32 analysts surveyed by Bloomberg. One expects a cut of 25 basis points. The monetary authority this month raised two interest rates and drained liquidity to stabilize the rupee, which slumped to a record low of 61.2125 a dollar on July 8. Steadying the local currency has become the monetary policy priority, the central bank said yesterday.

The RBI’s comments “suggest the possibility of further liquidity tightening in case of renewed downward pressure on the currency,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in a report. “Today, rates will remain unchanged.”

The yield on the 7.16 percent bonds due May 2023 rose five basis points, or 0.05 percentage point, to 8.18 percent as of 9:41 a.m. in Mumbai, according to prices from the central bank’s trading system. The rate, which has surged 73 basis points in July, was at 8.42 percent on July 24, the highest for a 10-year benchmark bond since May 2012. The rupee fell 0.4 percent to 59.6550 per dollar today, according to prices from local banks compiled by Bloomberg.

A weaker currency makes imports costlier and threatens to spur gains in consumer prices, which have climbed at an annual rate of about 10 percent for more than a year. The RBI this month capped the amount banks can borrow in daily repurchase auctions at 0.5 percent of deposits, and increased the daily balance requirement for lenders’ cash-reserve ratios to 99 percent from 70 percent. It raised the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent this month.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, climbed six basis points to 9.33 percent, data compiled by Bloomberg show. The rate was at a five-year high of 9.50 percent on July 24.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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