India’s 10-Year Bond Yield Near a Three-Month Low on Easing Bets

The yield on India’s 10-year bonds held near a three-month low on speculation the central bank will loosen monetary policy to help revive growth.

The Reserve Bank of India will lower reserve requirements for banks from an eight-year low of 4.5 percent at a policy review tomorrow, according to 23 of 33 economists in a Bloomberg survey. Ten predict no change. The RBI will cut the repurchase rate from 8 percent, according to 14 of the analysts, while the rest expect it to be unchanged. Since mid-September, Prime Minister Manmohan Singh has reduced fuel subsidies and allowed more foreign investment in industries including retailing.

“We expect the RBI to cut interest rates, by way of a pat on the back to the government for its various fiscal reforms,” Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore, wrote in a note today.

The yield on the benchmark 8.15 percent bonds due June 2022 held at 8.13 percent in Mumbai, matching the lowest level since July 27 reached last week, according to the central bank’s trading system. The market was closed on Oct. 26 for a holiday.

Quarterly expansion in Asia’s third-largest economy averaged 5.4 percent in the first half of 2012, compared with 7.5 percent in the whole of 2011.

The monetary policy may have space in future to support growth if price pressures ease and fiscal and trade deficits narrow, even as caution is necessary for now to focus on inflation, the nation’s central bank said.

“Monetary policy needs to be cautious in the interim, focusing on inflation while using the available space to support growth to the degree it can,” the Reserve Bank of India said in a report today ahead of its interest-rate decision in Mumbai tomorrow. If threats from inflation and the deficits recede, that “could yield space down the line for monetary policy to respond to growth concerns.”

The one-year interest-rate swap, derivative contracts used to guard against fluctuations in funding costs, fell one basis point, or 0.01 percentage point, to 7.59 percent, data compiled by Bloomberg show.

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