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India’s 2022 Bond Yield Drops to Seven-Week Low as Oil Declines

India’s bonds due 2022 advanced, pushing the yield to a seven-week low, on optimism falling oil prices will help ease inflation and give the central bank more room to cut interest rates.

Brent crude traded below $100 a barrel today for the first time since July, before rebounding, and has lost 11 percent this year. India imports about 80 percent of the oil it uses. The pace of wholesale-price gains fell to a 40-month low of 5.96 percent in March, official data showed yesterday. Annual expansion in factory output slowed to 0.6 percent in February from 2.4 percent the previous month, government data showed last week.

“If global commodity prices sustain their recent fall, then the trend in both headline and core wholesale inflation will be lower,” Nomura Holdings Inc. analysts including Mumbai-based Sonal Varma wrote in a research note. “With growth weak and inflation lower, we believe that a cut is more likely than not, but it is not a done deal.”

The yield on the 8.15 percent bonds due June 2022 was little changed at 7.83 percent in Mumbai, according to the central bank’s trading system. The rate earlier touched 7.80 percent, the lowest level since Feb. 27.

Nomura sees an 80 percent probability that the Reserve Bank of India will reduce its 7.5 percent repurchase rate by 25 basis points at the next review on May 3. The RBI lowered the measure by 25 basis points each in January and March.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.32 percent, data compiled by Bloomberg show.

The fall in gold and crude oil prices may help narrow India’s record high current-account deficit and cool inflation, increasing scope for interest-rate cuts, a central bank adviser said.

The slide in commodity prices is “definitely positive,” as it will reduce the shortfall in the widest measure of trade, Ashima Goyal, a member of the Reserve Bank of India’s technical advisory committee, said in an interview today. She is part of the panel that makes recommendations to Governor Duvvuri Subbarao on setting monetary policy.

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