India’s one-year interest-rate swaps touched a 27-month low on speculation cooling commodity prices and slowing economic growth will spur the central bank to reduce borrowing costs.
Brent crude oil fell 9.4 percent this month. India imports about 80 percent of its oil needs. Wholesale prices rose 5.96 percent in March, the least since November 2009 and below the central bank’s 6.8 percent projection for the month, official data showed last week. The monetary authority has lowered its repurchase rate by 50 basis points this year, and is scheduled to review policy next on May 3.
“The softening of commodity prices gives more headroom for the central bank to cut rates,” said Lakshmi Iyer, head of fixed income in Mumbai at Kotak Mahindra Asset Management Co., which oversees $6 billion.
The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell three basis points, or 0.03 percentage point, to 7.23 percent, according to the central bank’s trading system. That is the lowest level since January 2011.
The Reserve Bank of India will reduce the repo rate by 50 basis points by the end of September, Iyer predicts. India’s gross domestic product rose 5 percent in the fiscal year ended March 31, the least since 2003, the statistics agency estimates.
Bonds rose for a seventh day after Economic Affairs Secretary Arvind Mayaram said the government may borrow less this fiscal year than targeted in the budget as a revival in economic growth boosts tax revenue.
“We may actually be able to reach a situation where we borrow less than what we factored,” he said.
The government aims to trim the fiscal deficit to 4.8 percent of gross domestic product in the period, from 5.2 percent, to help damp inflation and boost room for more central bank interest-rate cuts. It set a gross borrowing target of 6.29 trillion rupees ($116 billion) in the Feb. 28 budget, including 500 billion rupees of bond switches and buybacks.
The economy may expand 6.4 percent in the fiscal year that began April 1, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council said today.
The yield on the 8.15 percent government bonds maturing in June 2022 fell two basis points to 7.74 percent, according to data compiled by Bloomberg. The rate is the lowest for a benchmark 10-year bond since July 2010.
Markets will be shut tomorrow for a public holiday.