Indian Bond Yields Decline to 2010 Low as Deficit Cut Predicted

Indian bonds due 2022 rose, pushing the yield to a 31-month low, on optimism the government will announce measures this week to reduce its deficit.

Finance Minister Palaniappan Chidambaram, who will present his annual budget to parliament tomorrow, will seek to cut the shortfall in public finances to 4.8 percent of gross domestic product the next fiscal year, from an estimated 5.3 percent in the 12 months through March, according to a Bloomberg survey. A narrowing of the gap will give the central bank more room to lower interest rates for the second time in 2013, according to Debendra Kumar Dash, a debt trader at Development Credit Bank.

“Investors are generally bullish on bonds as the macro-economic outlook seems positive, but are staying cautious before the budget,” Mumbai-based Dash said.

The yield on the 8.15 percent notes due June 2022 declined two basis points, or 0.02 percentage point, to 7.80 percent in Mumbai, according to the central bank’s trading system. The rate matched a level touched on Feb. 25, the lowest level since July 2010.

The Reserve Bank of India last cut its repurchase rate by 25 basis points to 7.75 percent on Jan. 29. The central bank will offer to purchase as much as 100 billion rupees ($1.9 billion) of government securities at an open-market auction on March 1, it said in a statement on Feb. 25.

India will probably contain the budget deficit at about 5.3 percent of gross domestic product this fiscal year as it tries to slow inflation, and economic growth is set to recover, Finance Ministry advisers said.

“The government is committed to fiscal consolidation,” they said in a report in New Delhi today, predicting GDP will rise as much as 6.7 percent in the year through March 2014.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.61 percent, data compiled by Bloomberg show.

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