India Bond Yield Drops to Three-Month Low on Rate Speculation

India’s benchmark bonds rose, driving the 10-year yield to a three-month low, as slowing economic growth fueled speculation the central bank will reduce borrowing costs next week.

The Reserve Bank of India will lower the repurchase rate by 25 basis points to 7.75 percent on June 18, according to 16 of 21 economists in a Bloomberg survey before a policy review on June 18. Three predicted the central bank will leave the rate unchanged and the rest forecast a 50 basis point reduction. Data published yesterday showed industrial production rose less than economists estimated in April.

“Monetary measures are definitely due soon as slumping growth is a concern,” said M. Natarajan, the Mumbai-based head of treasury at Bank of Nova Scotia. “Investors will also watch for guidance by the central bank at its policy review.”

The yield on the government’s 8.79 percent bonds due November 2021 fell one basis point, or 0.01 percentage point, to 8.29 percent in Mumbai, according to the central bank’s trading system. That was the lowest level since March 14.

The central bank will cut the repurchase rate by 25 basis points next week, said Natarajan. The monetary authority may also reduce lenders’ cash reserve requirements by 50 basis points to 4.25 percent over the next month, he said.

Factory output increased 0.1 percent in April from a year earlier after a revised 3.2 percent drop in March, the Central Statistical Office said in a statement yesterday. The median estimate in a Bloomberg survey was for a 1.7 percent gain. Gross domestic product rose 5.3 percent in the first quarter from a year earlier, the least in nine years, official data showed on May 31.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose three basis points to 7.51 percent, according to data compiled by Bloomberg.

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