India Bonds Set for Best Week in Month on RBI Pause; Rupee Drops

India’s 10-year government bonds headed for their best week this month after the central bank unexpectedly refrained from raising interest rates. The rupee weakened as the Federal Reserve said it will pare stimulus.

The Reserve Bank of India left its repurchase rate at 7.75 percent on Dec. 18, a move predicted by only five of 31 economists surveyed by Bloomberg. The rest had forecast an increase to 8 percent. The Fed will cut monthly bond purchases to $75 billion in January from $85 billion amid an improved outlook for the job market, it said Dec. 18.

“With an expected gradual increase in U.S. yields going forward, some upward bias of this could also be felt in emerging-market bond yields,” said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “However, in the immediate run, Indian bond yields are likely to be more dependent on domestic” policy conditions, he said.

The yield on India’s 8.83 percent sovereign notes due November 2023 dropped 16 basis points, or 0.16 percentage point, from a week ago to 8.75 percent as of 9:55 a.m. in Mumbai, according to the central bank’s trading system. That’s the steepest drop for a 10-year bond since the five days through Nov. 30. The rate rose one basis point today.

India will auction 150 billion rupees ($2.4 billion) of bonds at an auction today, according to the central bank.

The rupee fell 0.2 percent from Dec. 13 to 62.2750 per dollar, according to prices from local banks compiled by Bloomberg. It dropped 0.2 percent today and touched 62.4775 yesterday, its weakest level since Dec. 4.

Better Prepared

The rupee is expected to remain stable, Finance Minister Palaniappan Chidambaram said in New Delhi yesterday. Markets aren’t likely to be surprised by the Fed’s “moderate changes” and India is better prepared to deal with any consequences of the tapering, he added in an e-mailed statement yesterday.

The U.S. central bank reiterated that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.

Indications that Indian vegetable prices may fall, combined with a more stable exchange rate and lag effects from the previous rate increases give reason to hold the rate even though inflation is “too high,” the RBI said in a Dec. 18 statement. The central bank will act, possibly between policy meetings, if inflation doesn’t ease, it said.

‘Calculated Gamble’

Rajan “seems to be taking a calculated gamble,” analysts at Brown Brothers Harriman & Co., including Marc Chandler in New York, wrote in a research report yesterday. “For now, it appears to be working. However, with emerging markets expected to remain under pressure, there is a risk that the rupee will eventually suffer from this decision to keep rates steady.”

One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell two basis points today and 74 basis points from Dec. 13 to 10.77 percent. Three-month offshore non-deliverable forwards dropped 0.1 percent today to 63.54 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

To contact the reporter on this story: Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net

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

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