India’s one-year interest-rate swaps fell to a 27-month low on speculation a drop in commodity prices will slow inflation further, giving the central bank room to cut borrowing costs.
The yield on government bonds due 2022 approached the lowest level since July 2010 as Brent crude oil extended this month’s slide to almost 11 percent, which may help cut costs for a nation that imports about 80 percent of the oil it uses. Wholesale prices rose 5.96 percent in March, the least since November 2009, data showed this week. That was below the Reserve Bank of India’s 6.8 percent projection for the month.
“The outlook for prices to ease further has increased with the fall in global commodity prices,” said Arvind Chari, a senior fund manager at Quantum Asset Management Co. “This should provide scope for the central bank to cut rates, and swaps are reflecting that expectation.”
The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell five basis points to 7.28 percent in Mumbai, data compiled by Bloomberg show. That’s the lowest level since January 2011.
The yield on the 8.15 percent government bonds maturing in June 2022 fell two basis points, or 0.02 percentage point, to 7.80 percent, according to the central bank’s trading system. The rate had touched 7.79 percent in February, the lowest since July 2010, according to data compiled by Bloomberg.
The Reserve Bank last reduced its benchmark repurchase rate by 25 basis points to 7.5 percent on March 19. The next policy review is due on May 3.
Slowing wholesale-price gains has boosted odds of monetary-policy easing to support the economy, according to Raghuram Rajan, the top adviser in the nation’s Finance Ministry.
India’s gross domestic product rose 5 percent in the fiscal year ended March 31, the weakest pace since 2003, the statistics agency estimates. The government has changed policies since September to open Asia’s No. 3 economy to more investment, curb the budget shortfall and speed up stalled infrastructure projects.
Easing inflation “increases the probability of more accommodative monetary policy,” Rajan said in an interview yesterday. “Growth is below what you normally want.”
The plunge in gold prices in 2013 could cut India’s import costs by almost $7 billion in the 12 months ending March 2014, Barclays Plc said in a research note this week. Gold purchases account for more than two-thirds of India’s current-account deficit, according to the Reserve Bank.