Indian Bonds Gain as Diesel Policy Change to Help Cut Deficit

India’s bonds advanced for the first time in three days on optimism a government move to allow refiners to increase diesel prices will help reduce fuel subsidies and improve public finances.

The yield on the benchmark 10-year debt approached a 30-month low as Oil Secretary G.C. Chaturvedi said in New Delhi oil companies have been permitted to adjust prices of diesel over a period of time. Finance Minister Palaniappan Chidambaram is seeking to cut spending on subsidies as part of a plan to narrow the budget deficit to 5.3 percent of gross domestic product and avert a sovereign rating downgrade.

“The government’s move is good for its finances, especially as market expectations were for a loose fiscal policy ahead of the election year,” said Rohit Arora, a fixed-income strategist at Barclays Plc in Singapore. “Such news coming ahead of the budget should allay such market fears and should be positive for bonds.”

The yield on the 8.15 percent bonds due June 2022 fell four basis points, or 0.04 percentage point, to 7.84 percent in Mumbai, according to the central bank’s trading system. The rate touched 7.80 percent on Jan. 14, the lowest level for a benchmark 10-year security since July 2010.

Rate Cut

The budget for India’s April-March fiscal year is usually announced at the end of February. Indian refiners are losing 9.6 rupees (18 cents) on each liter of diesel they sell, according to oil ministry data.

The yield on the 10-year note has dropped 21 basis points this year after the government deferred a debt sale scheduled for this month to February and as inflation eased to a three-year low, spurring speculation of an interest-rate cut.

The benchmark wholesale-price index rose 7.18 percent in December from a year earlier, the commerce ministry said this week.

The Reserve Bank of India, which last lowered the repurchase rate by 50 basis points to 8 percent in April, will again reduce the rate by 25 basis points to 7.75 percent at the Jan. 29 review, 13 of 16 analysts predicted in a Bloomberg survey this week, while the rest expect a reduction to 7.5 percent.

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, was at 7.57 percent in Mumbai, data compiled by Bloomberg show. It was at 7.5750 percent yesterday.

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