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India Bonds Snap Three-Day Rally as Inflation Exceeds Estimate

Indian government bonds halted a three-day rally as inflation accelerated faster than estimated in May, prompting investors to scale back expectations for monetary-policy easing.

Yields rebounded from a three-month low as a government report today showed the benchmark wholesale-price index rose 7.55 percent from a year earlier, after climbing 7.23 percent in April. That was more than the 7.50 percent median estimate in a Bloomberg News survey. A majority of economists in a separate Bloomberg survey predict a 25 basis point cut in the repurchase rate at the next policy review on June 18.

“Inflation is still high,” said Lakshmi Iyer, the Mumbai-based head of fixed income and products at Kotak Mahindra Asset Management Co., which oversees $4.7 billion in assets. “Expectations of a 50 basis point cut of the repo rate have been quashed.”

The yield on the government’s 8.79 percent bonds due November 2021 rose four basis points, or 0.04 percentage point, to 8.34 percent in Mumbai, according to the central bank’s trading system. The yield reached 8.29 percent yesterday, the lowest level since March 14.

The Reserve Bank of India will lower the benchmark repurchase rate by 25 basis points to 7.75 percent, according to 17 of 23 economists in a Bloomberg survey. Four predicted the central bank will leave the rate unchanged and two forecast a 50 basis point cut.

Reserves Ratio

The monetary authority last reduced the repo rate by 50 basis points to 8 percent in April after raising it 13 times from March 2010 to October 2011. The reserves ratio for banks has been cut by 125 basis points this year to 4.75 percent. Three of 20 economists surveyed by Bloomberg predict a 50 basis point cut in reserve requirements next week, with the rest expecting no change.

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 this week. 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 six basis points to 7.56 percent, according to data compiled by Bloomberg.

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