India’s 10-year bonds rose, driving the yield to a two-week low, after the central bank unexpectedly refrained from increasing interest rates and the Federal Reserve said it will start unwinding stimulus.
Reserve Bank of India Governor Raghuram Rajan kept the repurchase rate at 7.75 percent yesterday, an outcome predicted by only five of 31 economists in a Bloomberg survey. The rest expected a hike to 8 percent after wholesale and consumer-price inflation accelerated last month. Fed Chairman Ben S. Bernanke said yesterday the central bank will trim bond purchases to $75 billion from $85 billion starting January, while pledging to hold interest rates close to zero.
“The bond market has been pleasantly surprised by the RBI’s move and that outweighs the sentimental impact from the tapering announcement, which was expected,” said Harish Agarwal, a fixed-income trader at FirstRand Ltd. in Mumbai.
The yield on India’s 8.83 percent sovereign notes due November 2023 dropped two basis points, or 0.02 percentage point, to 8.76 percent as of 10:09 a.m. in Mumbai, according to the central bank’s trading system. That’s the lowest since Dec. 2. The rate fell 13 basis points yesterday, the biggest decline for benchmark 10-year debt since Nov. 25.
The policy decision “is a close one,” the RBI said yesterday. Rajan had boosted the rate by 25 basis points in each of the two previous reviews since he took office Sept. 4. The RBI is “very uncomfortable” with the level of inflation, Rajan had said Dec. 12 after a report showed India’s consumer prices climbed 11.24 percent in November, the most in data compiled by Bloomberg going back to January 2012. Wholesale prices rose 7.52 percent from a year earlier, official data showed Dec. 16, the fastest since September 2012.
Bernanke took the first step toward exiting the unprecedented stimulus he put in place to help the economy recover from the worst recession since the 1930s. The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.
India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, fell one basis point to a one-week low of 8.46 percent, data compiled by Bloomberg show.
To contact the reporter on this story: Shikhar Balwani in Mumbai at firstname.lastname@example.org