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India’s 10-Year Bonds Climb for Second Day on Rate-Cut Optimism

India’s benchmark bonds gained for a second day on optimism slowing inflation will prompt the central bank to cut rates at a policy review next week.

The benchmark 10-year yield fell 20 basis points this month, the most since May, after the inflation rate dropped to a three-year low in December. Eleven of 14 analysts in a Bloomberg survey predict the RBI will cut its repurchase rate by 25 basis points to 7.75 percent at a Jan. 29 review, while two forecast a 50 basis point reduction and one sees no change.

“Our view has been and remains the most dovish of all,” Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG, wrote in a research note, predicting 125 basis points of repo rate cut in 2013. “Inflation is likely to surprise on the downside.”

The yield on the 8.15 percent bonds due June 2022 fell one basis point to 7.85 percent in Mumbai, according to the central bank’s trading system. The rate touched 7.8 percent on Jan. 14, the lowest level for a benchmark 10-year bond since July 2010.

The repurchase 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 smallest increase since 2009, government data showed last week.

Finance Minister Palaniappan Chidambaram said in an interview today that he would like interest rates to moderate to revive growth. Fiscal prudence will be a key part of his budget next month, he said, reiterating that he plans to stick to a budget-deficit target of 4.8 percent of gross domestic product in the year through March 2014.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 7.55 percent in Mumbai, according to data compiled by Bloomberg.

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