Indian Bonds Drop on Speculation RBI Will Reduce Debt Purchases

Indian 10-year bonds fell, snapping a two-day gain, on speculation the central bank will scale back open-market debt purchases after it cut reserve requirements for lenders to boost cash in the financial system.

The Reserve Bank of India lowered the cash-reserve ratio by a quarter percentage point to 4 percent yesterday and said the reduction would free up 180 billion rupees ($3.4 billion) at banks. The RBI has used securities purchases to pump money into markets in recent months, and has bought 1.2 trillion rupees of government notes in the year ending March 31.

“On bonds, the CRR cut may not be that positive as it reduces the scope for RBI open-market operations in February,” Nomura Holdings Inc. analysts including Mumbai-based Vivek Rajpal wrote in a research note. “The paring back of open-market operations expectations should affect the seven- to fifteen-year part of the” bond maturity curve, they wrote.

The yield on the 8.15 percent bonds due June 2022 rose one basis point, or 0.01 percentage point, to 7.86 percent as of 10:07 a.m. in Mumbai, according to the central bank’s trading system. That pared this month’s decline to 19 basis points.

The yield dropped two basis points yesterday as the central bank cut its benchmark repurchase rate by 25 basis points to 7.75 percent, the first reduction since April.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose one basis point to 7.60 percent in Mumbai, according to data compiled by Bloomberg.

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