Indian Bonds Head for First Monthly Gain in Five on Cash Supply

India’s 10-year bonds headed for their first monthly gain in five as the central bank took steps to boost cash supply and the Federal Reserve maintained its record stimulus that has buoyed emerging-market assets.

Reserve Bank of India Governor Raghuram Rajan cut the marginal standing facility rate to 8.75 percent from 9 percent on Oct. 29, the third reduction in two months, further easing the cash curbs imposed in July to support the rupee. He also added liquidity by raising lenders’ borrowing limits for term repurchase contracts. The Fed decided to press on with $85 billion in monthly bond purchases, saying it needs to see more evidence that the U.S. economy will continue to improve.

The yield on the 7.16 percent government notes due May 2023 dropped 18 basis points, or 0.18 percentage point, this month to 8.59 percent as of 9:47 a.m. in Mumbai, prices from the RBI’s trading system show. The rate, which was unchanged today, surged 153 basis points in the June to September period.

“Yields have somewhat stabilized after the central bank’s measures to boost liquidity,” said Srinivasa Raghavan, Mumbai-based executive vice-president of treasury at Dhanlaxmi Bank Ltd. (DHLBK) “The range that I’m expecting at least for a month is 8.50 percent to 8.70 percent.”

Rajan, who has said containing inflation is his top priority, raised the repurchase rate by 25 basis points to 7.75 percent this week, the second increase in two months. The move came after data showed wholesale prices in India rose 6.46 percent in September, the most in seven months, while consumer-price gains quickened to 9.84 percent.

Higher Inflation

“It is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth,” Rajan said in his Oct. 29 monetary policy statement. The stance seeks to manage inflation expectations amid weak economic expansion, and the central bank will “closely monitor inflation risk while being mindful of the evolving growth dynamics,” he said.

The RBI expects WPI inflation to remain higher than current levels through most of the remainder of the fiscal year ending March, with consumer prices remaining around or above 9 percent. It cut its economic growth forecast for the year to 5 percent from 5.5 percent.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, slumped 32 basis points this month to 8.40 percent after an 86-basis point plunge in September, data compiled by Bloomberg show. The rate was little changed today.

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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