India’s benchmark bonds gained, sending the 10-year yield toward a 30-month low, on optimism slowing inflation will create room for the central bank to cut interest rates.
Eleven of 14 analysts in a Bloomberg News survey predict the repurchase rate will be cut by 25 basis points at a Jan. 29 review, while two forecast a 50 basis point reduction. The rate was last lowered by half a percentage point in April. The wholesale-price index rose 7.18 percent in December from a year earlier, the least since 2009, government data showed last week.
“Investors have broadly priced in a 25 basis point cut in the repo rate at current yield levels,” said Lakshmi Iyer, Mumbai-based head of fixed income at Kotak Mahindra Asset Management Co.
The yield on the 8.15 percent bonds due June 2022 fell one basis point, or 0.01 percentage point, to 7.86 percent in Mumbai, according to the central bank’s trading system. The rate touched 7.80 percent on Jan. 14, the lowest level for a benchmark 10-year bond since July 2010.
The government is allowing state-owned refiners to raise prices of diesel gradually, Oil Secretary G.C. Chaturvedi said last week. Finance Minister Palaniappan Chidambaram is seeking to cut fuel subsidies as part of a plan to narrow the budget deficit to 5.3 percent of gross domestic product and avert a sovereign rating downgrade.
“The diesel policy move is an added positive and will enable the central bank to reduce rates,” said Iyer.
The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 7.56 percent in Mumbai, data compiled by Bloomberg show.