India’s Bond Yield Drops to Two-Week Low on Rate Cut Optimism

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India’s government bonds rose, pushing the 10-year yield to a two-week low, after a Reserve Bank of India adviser said there was scope to lower interest rates further.

The monetary authority may have room to cut the repurchase rate by another 50 basis points in 2015 as inflation is likely to be lower than than the RBI’s estimate of 5.8 percent by year-end, said Ashima Goyal, a member of the central bank’s technical advisory panel, which makes policy recommendations. The state-run weather forecaster today predicted that India’s June-September rainfall will be below normal for a second year.

“While the below normal monsoon forecast was a dampener, the RBI adviser comments aided sentiment,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “Inflation is likely to remain benign and that will enable the RBI to cut rates further.”

The yield on the 8.4 percent notes due July 2024 fell two basis points, or 0.02 percentage point, to close at 7.75 percent in Mumbai, prices from the Reserve Bank of India’s trading system show. That’s the lowest level since April 6.

Consumer inflation unexpectedly eased to 5.17 percent in March from a year earlier, government data showed last week. Foreign investors have poured more than $15 billion into Indian stocks and bonds this year after a record $42 billion in inflows in 2014.

The rupee closed little changed at 62.83 a dollar, prices from local banks compiled by Bloomberg show. The currency erased gains of as much as 0.2 percent after the RBI adviser said the central bank would probably favor a further retreat in the rupee to combat a slump in exports.

“The rupee has appreciated in real terms and needs to weaken to 64 or maybe 65” a dollar this year, Goyal said. “Current capital inflows are excessive” and that’s fueling appreciation, she said.

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