India Bonds Complete Weekly Gain on Rate-Cut Bets; Rupee Climbs

India’s 10-year bonds completed their biggest weekly gain this month on optimism debt purchases by the monetary authority and expectations of interest-rate cuts will boost demand. The rupee also advanced.

The Reserve Bank of India bought 78.99 billion rupees ($1.4 billion) of securities at an open-market auction today, according to a statement on its website. At a policy review on Dec. 18, the RBI signaled it will cut interest rates in the coming months, after holding the repurchase rate at 8 percent for a fifth meeting.

“The prospects for government bonds are pretty good as interest-rate cuts are expected next quarter to support growth,” Upasna Bhardwaj, an economist in Mumbai at ING Vysya Bank, a unit of the biggest Dutch financial-services company, said in an interview yesterday. “Yields may slide as the continuation of open-market purchases is also a positive.”

The yield on the 8.15 percent notes due June 2022 fell four basis points, or 0.04 percentage point, this week to 8.11 percent in Mumbai, the lowest level since July, according to the central bank’s trading system. The yield was little changed today and has dropped 46 basis points this year.

Asia’s third-largest economy expanded 5.3 percent in the three months through September, matching a first-quarter growth rate that was the lowest in three years. Wholesale-price increases will average 7.7 percent this quarter and 7.2 percent in the first three months of 2013, according to the median estimates of economists surveyed this month by Bloomberg.

Inflation Ebbing

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth,” the Reserve Bank said in a statement on Dec. 18.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell five basis points this week to 7.63 percent, data compiled by Bloomberg show. The contract was at 7.75 percent at the end of 2011.

India’s rupee rose this week as data showed global funds increased ownership of local shares at the fastest pace in 10 months after policy makers stepped up efforts to revive the economy.

Foreign funds bought $4.1 billion more shares than they sold this month through Dec. 26, set for the biggest addition to holdings since February.

The rupee rose 0.5 percent this week to 54.7750 per dollar in Mumbai, according to data compiled by Bloomberg. It has lost 3.1 percent this year, a drop second only to Indonesia’s rupiah among Asia’s 10 most-used currencies excluding the yen.

One-month implied volatility in the rupee, a gauge of expected moves in exchange rates used to price options, was unchanged at 10 percent. The measure decreased 200 basis points in 2012.

Three-month onshore rupee forwards traded at 55.74 per dollar, compared with 55.88 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.70 versus 55.78. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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