India Bond Yields at 1-Week Low as RBI Cuts Rates, Reserve Ratio

Indian bonds gained, pushing yields to a one-week low, as the central bank reduced interest rates for the first time since April and cut the amount of deposits lenders must set aside as reserves.

The Reserve Bank of India reduced the repurchase rate today to 7.75 percent from 8 percent, a move predicted by 30 of 35 analysts in a Bloomberg News survey. Four forecast a reduction to 7.5 percent and one saw no change. Governor Duvvuri Subbarao cut the cash reserve ratio to 4 percent from 4.25 percent, effective Feb. 9, injecting 180 billion rupees ($3.35 billion) into the banking system. The finance ministry has already completed more than 90 percent of its record 5.7 trillion rupees borrowing target for the fiscal year ending March 31.

“With no government bond issuance scheduled in March, and with further rate cuts expected, we expect yields to decline further, albeit gradually,” Standard Chartered Bank analysts including Anubhuti Sahay said in a research note today. “Although the repo rate cut was positive, the market seems to be disappointed with the RBI’s preference for a CRR cut over open-market debt purchases to inject liquidity.”

The yield on the 8.15 percent bonds due June 2022 fell two basis points, or 0.02 percentage point to 7.85 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.

Standard Chartered Bank predicted the repo rate will drop to 7 percent by the end of 2013, sending the yield on the 10-year government bond to 7.25 percent.

Limited Space

India’s economy will expand 5.5 percent in the year through March 2013, less than an earlier estimate of 5.8 percent, the Reserve Bank said. The prediction for wholesale-price inflation was cut to 6.8 percent from 7.5 percent.

“There is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-2014,” the Reserve Bank said. “This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.”

The central bank added that policy guidance will be “conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.”

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points to 7.59 percent in Mumbai, according to data compiled by Bloomberg.

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