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India’s Bond Yield at Three-Year Low on Rate-Cut Speculation

Indian bonds gained, sending the 10-year yield to a three-year low, on speculation the central bank will further cut interest rates amid easing inflation.

The wholesale-price index rose 4.89 percent in April, the least in 41 months, the government reported this week, prompting Reserve Bank of India Governor Duvvuri Subbarao to say the data will be factored into decisions at the next meeting on June 17. The central bank last lowered the repurchase rate by 25 basis points to 7.25 percent on May 3, the third reduction this year.

“Some investors are expecting more rate cuts, driving yields lower,” said Srinivasa Raghavan, the Mumbai-based executive vice president of treasury at Dhanlaxmi Bank Ltd. “There might be some correction at these levels as bonds have rallied quite a bit.”

The yield on the 8.15 percent notes due June 2022 fell 7 basis points, or 0.07 percentage point, to 7.40 percent in Mumbai, according to the central bank’s trading system. That’s the lowest level for a benchmark 10-year bond since May 2010.

“We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy,” Subbarao said in Frankfurt on May 14.

Foreign funds boosted their holdings of rupee-denominated debt by $76.3 million to a record $37.8 billion on May 14, Securities & Exchange Board of India data show.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.09 percent, according to data compiled by Bloomberg.

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