Indian Bonds Snap Two-Day Decline as Economists Predict Rate Cut

Indian bonds advanced, snapping a two-day loss, as economists predicted the central bank will cut its benchmark interest rate for the first time in nine months to support the economy.

Twenty-five of 29 analysts surveyed by Bloomberg forecast Reserve Bank of India Governor Duvvuri Subbarao will lower the repurchase rate by 25 basis points to 7.75 percent tomorrow, while three expect a 50 basis point reduction and one sees no change. The wholesale-price index, the benchmark inflation measure, rose 7.18 percent in December from a year earlier, the smallest increase since 2009, government data showed this month.

“Inflation has already eased in recent months, giving some room for maneuver” for monetary policy, Credit Agricole SA strategists including Frances Cheung wrote in a research note today, projecting a 25 basis point repo-rate decrease.

The yield on the 8.15 percent bonds maturing in June 2022 fell two basis points, or 0.02 percentage point, to 7.87 percent in Mumbai, according to the central bank’s trading system. The rate has dropped 17 basis points this month. Local bond and currency markets were closed on Jan. 25 for a holiday.

The Reserve Bank of India said today the government’s economic-policy overhaul may boost room to focus on spurring growth. The RBI’s repo rate was last lowered by half a percentage point in April, the only reduction since 2009.

‘Calibrated Stance’

Finance Minister Palaniappan Chidambaram said last week he wanted interest rates to moderate to spur growth in Asia’s third-largest economy. Gross domestic product will rise as little as 5.7 percent in the year through March, the government said Dec. 17. That would be the slowest pace since 2003.

“The balance of macroeconomic risks suggest continuation of the calibrated stance, while increasingly focusing on growth risks,” the central bank said in a report today. “Reforms since September 2012 have reduced immediate risks, but there is a long road ahead to bring about a sustainable turnaround for the Indian economy.”

Prime Minister Manmohan Singh’s administration has taken a series of measures since mid-September, including allowing more international investment in retailing and aviation, to revive Asia’s third-largest economy and avert a downgrade in the sovereign rating. India on Jan. 17 partially freed diesel prices from state control to curb fuel subsidies.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.56 percent in Mumbai, according to data compiled by Bloomberg.