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India Bonds Gain Most in a Month on Bets RBI to Resume Rate Cuts

Indian government bonds rose the most in a month on speculation the central bank will resume interest-rate cuts after holding borrowing costs today.

Governor Duvvuri Subbarao kept the repurchase rate unchanged at 7.25 percent, as predicted by 15 of 25 analysts in a Bloomberg News survey. Ten had forecast a reduction of 25 basis points. Conspicuously absent in the policy report was any reference to the Reserve Bank of India having “little room” to ease policy, a prominent term in recent communication, Roland Randall, a Singapore-based economist at Australia & New Zealand Banking Group Ltd., wrote in a note. The RBI will next review policy on July 30.

“The forward guidance suggests that the RBI’s policy stance is still biased towards cutting rates,” Mumbai-based Nomura Holdings Inc. economists Sonal Varma and Aman Mohunta wrote in a research note. “We pencil in a 50 basis point cut in the repo rate in the second half of 2013 with consumer price inflation and the rupee likely to determine the timing of the moves.”

The yield on the benchmark 8.15 percent notes due June 2022 fell eight basis points, or 0.08 percentage point, to 7.45 percent in Mumbai, according to the central bank’s trading system. That’s the biggest drop since May 14.

Growth Risks

The monetary authority has cut the repurchase rate by 75 basis points this year to help the economy recover from the weakest growth in a decade. India’s gross domestic product expanded 5 percent in the fiscal year ended March 31, according to government data.

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the Reserve Bank said, adding it stands ready to “respond rapidly and appropriately to any adverse developments.”

“It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” the monetary authority said. “While several measures have been taken to contain the current-account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows.”

The rupee declined 6.2 percent this quarter, the worst performer among Asia’s 11 most-traded currencies. India’s consumer price index rose 9.31 percent in May from a year earlier, holding above 9 percent for 15 straight months, official data showed last week.

The one-year interest-rate swap, a derivatives contract used to guard against fluctuations in funding costs, fell three basis points to 7.20 percent, according to data compiled by Bloomberg.

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