Bets on Dovish RBI Head Spur India’s Best Bond Rally Since April

Indian sovereign bonds climbed the most since early April as speculation mounted that the nation’s yet-to-be-named new central bank chief will be more aggressive in cutting interest rates.

A successor to Reserve Bank of India Governor Raghuram Rajan may be announced soon, the CNBC television channel said Tuesday, following a report by Bloomberg TV India Monday that Arvind Panagariya, vice chairman of a policy research group established by Prime Minister Narendra Modi, was the top contender for the job. Rajan, whose term ends Sept. 4, was accused by a member of Modi’s ruling party of keeping borrowing costs too high.

The yield on notes due January 2026 fell five basis points, the most since April 4, to 7.34 percent in Mumbai, prices from the central bank’s trading system show. That’s the lowest close for benchmark 10-year debt since June 2013.

“The rally is sparked by hopes that the next central bank governor will be more dovish,” said Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. in New Delhi. “If you look at Panagariya’s past statements, they have been pretty dovish.”

Other names doing the rounds for the post include Urjit Patel, one of Rajan’s deputies at the RBI who has helped establish an inflation target, and Arvind Subramanian, Modi’s top economic adviser. The new governor faces the challenge of keeping inflation under check, given the central bank’s target to limit price gains to 5 percent by March 2017, while maintaining currency stability as emerging markets deal with the implications of Brexit and a potential increase in U.S. interest rates.

Inflation, Rupee

Rajan, who took charge in 2013, is credited with curbing rupee and building a war chest of foreign-exchange reserves to help shield local markets from global shocks. Those moves, along with the implementation of an inflation-targeting regime in collaboration with the government, helped boost investor confidence in Asia’s third-largest economy. He has kept benchmark rates on hold since cutting them to a five-year low in April.

Inflation probably accelerated to a 22-month high of 5.79 percent in June, according to the median estimate in a Bloomberg survey before data due later on Tuesday.

The rupee weakened 0.1 percent, halting a three-day gain, to 67.1825 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. It has appreciated 0.5 percent this month.

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