India 10-Year Bonds Gain Most in Five Months as Inflation Eases

India’s bonds advanced the most since August after inflation slowed to a three-year low, spurring speculation the central bank will cut interest rates this month.

The benchmark wholesale-price index rose 7.18 percent in December from a year earlier, after climbing 7.24 percent in November, the commerce ministry said today. The median of 34 estimates in a Bloomberg News survey was for a 7.37 percent increase. The Reserve Bank of India last lowered the repurchase rate by 50 basis points to 8 percent in April. Consumer prices gained 10.6 percent, compared with 9.9 percent the previous month, the statistics ministry reported today.

“Bonds are gaining as the drop in wholesale prices has given rise to expectations of a 50 basis point cut in rates among some investors,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai. “Given that consumer prices are still elevated, the rally may be overdone.”

The yield on the 8.15 percent bonds due June 2022 fell seven basis points, or 0.07 percentage point, to 7.80 percent in Mumbai, according to the central bank’s trading system. That was the biggest drop since Aug. 7 and the lowest level for a benchmark 10-year security since July 2010.

Rate Cuts

The 10-year yield has dropped 15 basis points this year, after declining 52 basis points in 2012.

The central bank will reduce the repurchase rate by 25 basis points at a policy review on Jan. 29, Pan predicted.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell four basis points to 7.49 percent, the lowest level since June, data compiled by Bloomberg show.

“We think the recent rally in bonds is a long due catch-up rally and expect this outperformance to continue as rate cuts are realized,” Barclays Plc analysts including Siddhartha Sanyal said in a research note today. “On a relative-value basis, we expect the bonds outperformance versus swaps to continue.”

The Reserve Bank will lower its policy rate by 50 basis points to 7.5 percent by the end of March, according to 11 of 22 economists surveyed by Bloomberg. Eight of those see a 25 basis point cut by the end of this quarter. Of the remaining three, UBS AG forecasts a 100 basis point reduction, Westpac Banking Corp. predicts no change, while Woori CBV Securities Corp. sees a quarter of a percentage point increase.

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