India’s benchmark bonds completed their best month since June after the central bank cut interest rates for the first time since April.
The Reserve Bank of India reduced its repurchase rate by 25 basis points to 7.75 percent on Jan. 29 and predicted the economy will expand 5.5 percent in the year ending March 31, the least since 2003. Governor Duvvuri Subbarao also cut the amount of deposits lenders must set aside as reserves to 4 percent from 4.25 percent, effective Feb. 9, releasing 180 billion rupees ($3.4 billion) into the banking system.
“Yields will continue to soften in the coming months in a gradual manner,” said Anoop Verma, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “The timing of the next rate cut will be dictated by macro-economic data as the central bank seeks to maintain a cautious balance between growth and inflation.”
The yield on the 8.15 percent bonds due June 2022 fell 14 basis points, or 0.14 percentage point, this month to 7.91 percent in Mumbai, according to the central bank’s trading system. It rose two basis points today. The rate touched 7.80 percent on Jan. 14, the lowest level for a benchmark 10-year bond since July 2010.
The RBI will reduce the repo rate further by 50 basis points in 2013, Verma predicted. The monetary authority cut this week its inflation estimate for March 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 in its policy review on Jan. 29. “This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.”
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose two basis points this month to 7.63 percent in Mumbai, data compiled by Bloomberg show.