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India’s Bond Yields Decline Toward Two-Month Low on Rate Outlook

India’s benchmark bonds rose, pushing yields toward a more than two-month low, on speculation the central bank will reduce borrowing costs for a second time this year to arrest an economic slowdown.

The Reserve Bank of India has more room to cut interest rates after economic growth slowed and oil prices dropped, Deputy Governor Subir Gokarn said this week. Prime Minister Manmohan Singh yesterday pledged measures to revive economic growth, echoing similar statements from global policy makers. China cut rates today for the first time since 2008.

“Monetary easing is definitely on the cards,” said Pradeep Madhav, managing director at Mumbai-based STCI Primary Dealer Ltd. “Yields may soften, given the weak growth outlook.”

The yield on the government’s 8.79 percent bonds due November 2021 fell three basis points, or 0.03 percentage point, to 8.35 percent in Mumbai, according to the central bank’s trading system. The rate touched 8.34 percent on June 5, the lowest level since March 14.

STCI’s Madhav predicted the central bank will cut the repurchase rate and banks’ cash reserve ratio by 25 basis points each at its next policy review on June 18.

The monetary authority last cut the repo rate by 50 basis points to 8 percent in April after raising it 13 times between March 2010 and October 2011. The reserve ratio has been cut by 125 basis points this year to 4.75 percent.

India’s economy expanded 5.3 percent in the first quarter from a year earlier, the least in nine years, according to official data published last week. Brent crude oil has dropped 19 percent to $101.56 per barrel since March. India imports about 80 percent of its oil.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell four basis points to 7.65 percent, according to data compiled by Bloomberg.

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