Indian sovereign bonds fell as the central bank reiterated that room to cut borrowing costs this year to support economic growth is limited because of inflation and a record current-account deficit. The rupee weakened.
“The balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,” the monetary authority said in a statement today after lowering the benchmark repurchase rate to 7.25 percent from 7.50 percent. The Reserve Bank of India also said it will reduce the proportion of lenders’ bond holdings that are shielded from market fluctuations, referring to the hold-to-maturity category.
“The market is reacting to the RBI’s guidance and the change in the HTM rules,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “While I do think we will see more rate cuts in future, they will depend on the inflation trajectory.”
The yield on the 8.15 percent securities due June 2022 rose one basis point, or 0.01 percentage point, to 7.74 percent in Mumbai, according to the central bank’s trading system. The yield touched 7.68 percent yesterday, the lowest level for a benchmark 10-year note since July 2010, and is little changed this week.
Thirty-three of 40 economists surveyed by Bloomberg predicted the cut in the repurchase rate today. Six forecast no change and one projected a reduction to 7 percent. Consumer prices increased by more than 10 percent in each of the four months through March from a year earlier, government data show. The current-account deficit widened to an all-time high of $32.6 billion in the quarter through December, according to the latest available data.
The rupee declined 0.2 percent to 53.9350 per dollar, according to data compiled by Bloomberg. It touched 53.6650 yesterday, the strongest level since Feb. 28, and has gained 0.8 percent this week. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, fell 42 basis points, or 0.42 percentage point, from yesterday to 8.37 percent.
India’s central bank will buy as much as 100 billion rupees ($1.9 billion) of bonds maturing in 2017, 2024, 2025 and 2032 on May 7, the RBI said in a statement after trading hours.
The European Central Bank yesterday cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession. ECB President Mario Draghi signaled another reduction is possible. U.S. Federal Reserve officials raised the prospect of increasing the monthly pace of bond buying above $85 billion to guard against any slump in employment growth.
Three-month onshore rupee forwards traded at 54.92 per dollar, compared with 54.81 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.60 versus 54.41. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.