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India Bonds Complete Best Month Since May 2010 on Cash Measures

India’s 10-year bonds completed the best month since May 2010 as Reserve Bank of India Deputy Governor Subir Gokarn signaled the central bank will take more steps to ease a cash squeeze.

Yields dropped after Gokarn said another cut in lenders’ cash reserve ratio, following last week’s 50 basis point reduction, is “always on the table.” The monetary authority has bought 719 billion rupees ($14.6 billion) of securities since November to ease a money-market squeeze, according to central bank data.

Lenders borrowed an average 1.1 trillion rupees a day from the central bank to meet shortages in the past three months, up from 515 billion rupees in the prior period, official data show.

“The central bank will have to infuse liquidity as the situation is beyond its comfort level,” said Phani Shankar, head of financial markets at ING Vysya Bank Ltd. in Mumbai. “Investors are expecting more open market purchases to ease the tightness.”

The yield on the 8.79 percent notes due November 2021 fell 30 basis points, or 0.30 percentage points, this month to 8.27 percent in Mumbai, according to the central bank’s trading system. The rate fell two basis points today.

The reduction in cash reserve ratio to 5.5 percent on Jan. 24 was the first since 2009. That added about 320 billion rupees to the banking system, according to the monetary authority. Banks borrowed 1.4 trillion rupees from the Reserve Bank of India’s overnight repurchase window today, according to central bank data.

‘Assessing Tightness’

“At this point, open-market operation is still an approach that we are following in response to assessment of the liquidity tightness,” Gokarn told reporters. “We will consider the cash reserve ratio cut, if it does happen, only in the mid-quarter review.”

The next review is scheduled on March 15.

The Reserve Bank of India, which has boosted the repurchase rate 13 times in the past two years to 8.5 percent, will cut it by 50 basis points to 8 percent by June 30, according to six of eight strategists in a Bloomberg survey.

“The RBI may cut the repurchase rate and reserve requirements in March,” said J. Moses Harding, a Mumbai-based executive vice president at IndusInd Bank Ltd. “Open-market buying of bonds is also on the cards to ease the liquidity crunch.”

Harding predicts the Reserve Bank will decrease the cash-reserve ratio by 50 basis points and the repurchase rate by 25 basis points in March, pushing 10-year bond yields toward 8 percent.

At last week’s policy review, the RBI reduced India’s growth forecast to 7 percent for the year through March, from a 7.6 percent prediction in October.

The cost of one-year, interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose 41 basis points this month to 8.16 percent, according to data compiled by Bloomberg. It rose 4 basis points today.

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