Indian Bonds Decline as Subbarao Sees Limited Scope to Cut Rates

India’s benchmark bonds fell, snapping a two-day gain, as central bank Governor Duvvuri Subbarao said he sees limited scope for cutting interest rates after yesterday’s first reduction since 2009.

Yields on most-traded debt due 2021 rebounded from a one-month low. The Reserve Bank of India reduced the repurchase rate by a greater-than-forecast half a percentage point to 8 percent in Mumbai yesterday. The monetary authority forecast inflation at 6.5 percent in March 2013, little changed from last month’s 6.89 percent that was almost twice the pace of price increases in China.

“Bonds will find it difficult to rally from here given that the RBI will be restricted in reducing rates,” said Vivek Rajpal, a Mumbai-based fixed-income strategist at Nomura Holdings Inc. “Hurdles to rate cuts are on the higher side because inflation is likely to remain sticky during the course of the year.”

The yield on the 8.79 percent bonds due November 2021 rose two basis points, or 0.02 percentage point, to 8.36 percent in Mumbai, according to the central bank’s trading system. The rate touched 8.30 percent earlier, the lowest since March 12.

“The probability of a rate hike and the probability of a further rate cut are non-zero but small,” Subbarao told Bloomberg UTV in an interview in Mumbai today.

The government plans to sell a record 5.7 trillion rupees ($110 billion) of bonds in the year through March 2013, 12 percent more than in the last fiscal year.

“The heavy debt sale program will also keep an upward pressure on yields,” said N.S. Venkatesh, head of treasury at state-owned IDBI Bank Ltd. in Mumbai.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose three basis points to 7.89 percent, data compiled by Bloomberg show.

-With assistance from Manish Modi in New Delhi.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE