India’s bonds advanced the most in almost two months on optimism the government will take steps to revive economic growth and rein in inflation.
Palaniappan Chidambaram, who took over as finance minister last week, said yesterday fiscal and monetary policies must “move in tandem” and that the government will work with the central bank to curb price increases. India plans to cut the budget deficit to 5.1 percent of gross domestic product in the year to March 2013, from 5.8 percent in the previous 12 months, according to official estimates.
“Investors have drawn some comfort from the statements on the fiscal side,” said Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “There is some hope of interest-rate easing in the future.”
The yield on the 8.15 percent notes due June 2022 fell seven basis points, or 0.07 percentage point, to 8.15 percent in Mumbai, according to the central bank’s trading system. The rate on a benchmark 10-year bond has dropped the most since June 12.
A panel has been established to help the government in “formulating the path of fiscal consolidation” and is expected to complete its work in a few weeks, Chidambaram said.
Reserve Bank of India Governor Duvvuri Subbarao left the repurchase rate unchanged at 8 percent at a policy review on July 31, citing inflation risks including a weaker rupee, the negative effect of below-average rains on crops and the possible increase in prices of subsidized fuel.
High Interest Rates
The benchmark rate was last cut by 50 basis points in April. At the review last month, Subbarao reduced the economic-growth forecast to 6.5 percent for the current fiscal year, from an earlier prediction of 7.3 percent. The economy expanded 6.5 percent in the 12 months through March.
“We are conscious that current interest rates are high,” the finance minister said yesterday. “Sometimes it is necessary to take carefully calibrated risks in order to stimulate investment and to ease the burden on consumers. We will take appropriate steps in this regard.”
Inflation has held above 7 percent for five months, more than the monetary authority’s threshold of 5 percent. The wholesale price index rose 7.25 percent in June, compared with 7.55 percent in May, according to official data.
“The finance minister’s statement on interest rates suggests that there will be political pressure on the RBI to cut interest rates,” Nomura Holdings Inc. economists, including Sonal Varma, said in a research note today. “Overall, we view the minister’s statements as positive and a promise that decision making is set to accelerate. However, it is too early to rejoice. The government has to walk the talk.”
One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell two basis points to 7.70 percent, according to data compiled by Bloomberg.