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Indian 10-Year Bonds Rally as Inflation Declines to 10-Month Low

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Dec. 14 (Bloomberg) -- India’s bond yields fell to a seven-week low on optimism the slowest inflation in 10 months will give the central bank more room to ease monetary policy and support the economy.

The benchmark wholesale-price index rose 7.24 percent in November from a year earlier, the commerce ministry said in a statement, compared with the median forecast in a Bloomberg News survey for a 7.6 percent gain. Prices climbed 7.45 percent in October. Asia’s third-largest economy grew 5.3 percent in the July-September quarter, according to the latest government data, matching the slowest pace since 2009.

“With the easing of inflation, there is clearly scope for the Reserve Bank of India to support growth,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Mumbai. “It is only a matter of time before they cut interest rates.”

The yield on the 8.15 percent notes due June 2022 fell two basis points, or 0.02 percentage point, to 8.14 percent, according to the central bank’s trading system. That’s the lowest level since Oct. 29. The rate fell three basis points this week.

The Reserve Bank of India will cut lenders’ cash reserve requirement for a fifth time this year at a review on Dec. 18, economists in Bloomberg survey predicted. The RBI will lower the proportion of deposits banks must set aside as reserves by 25 basis points to 4 percent on Dec. 18, according to 19 of 23 economists in a Bloomberg survey. One predicted a 50 basis point reduction, while the rest expect no change.

Interest Rates

The central bank, which last cut the repurchase rate by 50 basis points in April, will hold the rate at 8 percent the same day, according to 24 of 25 analysts in a separate survey, with one predicting a 50 basis point cut. At the last policy review on Oct. 30, Governor Duvvuri Subbarao signaled the monetary authority may ease policy in the January-to-March quarter.

India needs “bold and innovative measures” to turn the economy around and more steps will be taken in the coming weeks, Finance Minister Palaniappan Chidambaram said today.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell five basis points, the most in a week, to 7.63 percent today, data compiled by Bloomberg show. It slipped three basis points this week.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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