India’s bonds fell on speculation yields near a 30-month low will deter investors.
The yield has dropped 18 basis points this month, headed for the biggest decline since May, on optimism the central bank will cut rates at a Jan. 29 review. Fifteen of 18 analysts in a Bloomberg survey predict the Reserve Bank of India will cut its repurchase rate by 25 basis points to 7.75 percent on Jan. 29, while two forecast a 50 basis point reduction and one sees no change.
Investors are probably refraining from adding to their purchases as there is some talk of reduction in the proportion of deposits invested in government bonds from 23 percent, according to Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd.
“There has been some profit-taking as bonds have rallied quite a bit,” Mumbai-based Dash said. “Any cut in statutory liquidity ratio, aimed at boosting cash supplies and spurring growth, may hurt demand for government notes.”
The yield on the 8.15 percent bonds due June 2022 rose two basis points, or 0.02 percentage point, to 7.87 percent in Mumbai, according to the central bank’s trading system. It touched 7.83 percent earlier, approaching the lowest level since July 2010 of 7.8 percent reached on Jan. 14.
Finance Minister Palaniappan Chidambaram would like borrowing costs to ease to help spur growth, he said in an interview yesterday. Fiscal prudence will be a key part of next month’s budget, he said, reiterating a goal of 4.8 percent of gross domestic product for the government’s deficit in the year through March 2014.
“The RBI is clearly teed up for rate cuts, banking on an easing of inflation in coming quarters, fiscal consolidation commencing, and structural reform implementation continuing,” HSBC Holdings Plc economists, including Singapore-based Leif Eskesen, wrote in a research note today. “But it is likely to tread carefully, given lingering inflation risks, limiting the possible policy rate cut to 25 basis points.”
The RBI’s repo rate was last lowered by half a percentage point in April. The wholesale-price index used to measure inflation rose 7.18 percent in December from a year earlier, the smallest increase since 2009, government data showed last week. A 7 percent inflation rate was “unacceptable,” Chidambaram said in Singapore today.
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points to 7.56 percent in Mumbai, according to data compiled by Bloomberg.