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India 10-Year Bond Gains Most in 6 Months After RBI Holds Rates

India’s 10-year bonds gained the most in six months after the central bank refrained from raising borrowing costs for the first time in eight meetings as economic growth moderates.

Yields fell to this quarter’s lowest level after the Reserve Bank of India left the repurchase rate at 8.50 percent today, a decision forecast by all 14 economists surveyed by Bloomberg. Factory output fell 5.1 percent in October from a year earlier, the first contraction since June 2009, government data published this week showed. Slowing growth is contributing to a decline in inflation, the central bank said.

“The tone of the RBI’s statement is encouraging for bond investors,” said N.S. Venkatesh, head of treasury at Mumbai-based IDBI Bank Ltd. “Since inflation is on an easing path, investors are betting on a cut in rates in the coming months.”

The yield on the 8.79 percent bonds due November 2021 fell 11 basis points, or 0.11 percentage point, to 8.38 percent in Mumbai, according to the central bank’s trading system. That was the most since May 5. The rate is the lowest level for benchmark 10-year bonds since Sept. 28.

The central bank has increased the repurchase rate 13 times since the start of 2010. The benchmark wholesale-price index rose 9.11 percent in November from a year earlier, compared with 9.73 percent the previous month, data showed this week.

“Inflationary pressures are expected to abate in coming months despite high crude prices and the rupee’s depreciation,” the RBI said.

RBI Governor Duvvuri Subbarao told reporters in Mumbai today that he won’t speculate when the central bank would start cutting rates, saying a “rate cut is an event some way ahead.”

Crude prices have climbed 18 percent this quarter to $93.86 a barrel in New York. India imports about 80 percent of its oil and a weaker currency pushes up its costs.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell three basis points to 7.78 percent, according to data compiled by Bloomberg.

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