India’s Bonds Gain Most in Two Months on Rate-Cut Speculation

The yield on India’s government bonds maturing 2022 dropped the most in almost two months on speculation slowing economic growth will prompt the central bank to cut borrowing costs next week.

The Reserve Bank of India will lower the repurchase rate 25 basis points to 7.5 percent on March 19, according to 15 of 16 economists in a Bloomberg News survey. Nomura Holdings Inc. sees no change. The government has “firmly embraced” fiscal responsibility, RBI Governor Duvvuri Subbarao said yesterday, after Finance Minister Palaniappan Chidambaram vowed on Feb. 28 to cut the budget deficit by 0.4 percentage point to 4.8 percent of gross domestic product in the year starting April 1.

“A rate cut is on the cards as growth is a concern,” said Arvind Chari, a senior fund manager at Quantum Asset Management Co. in Mumbai. “The efforts to consolidate the government’s finances will also provide room for monetary easing.”

The yield on the 8.15 percent bonds maturing in June 2022 fell 4 basis points, or 0.04 percentage point, to 7.87 percent in Mumbai, according to the central bank’s trading system. That’s the biggest decline since Jan. 17.

Asia’s third-largest economy grew 4.5 percent last quarter from a year earlier, the slowest pace since the three months through March 2009, the government reported last month.

Wholesale-price inflation unexpectedly accelerated to 6.84 percent in February from 6.62 percent in January, the Commerce Ministry said in a statement today. A Bloomberg News survey had predicted a 6.59 percent increase.

Non-food manufactured goods prices, a measure of core inflation, advanced 3.8 percent after a 4.1 percent gain in January, according to Bloomberg calculations based on the data.

‘Downward Trajectory’

“Headline inflation accelerated mainly due to increase in fuel product prices but the core inflation is on a downward trajectory,” said Chari. That spurred gains in bonds, he said.

The RBI cut the repurchase rate by 25 basis points to 7.75 percent in January, the first reduction in nine months.

“Credible” fiscal consolidation is “a necessary pre-condition for stabilizing inflation and securing non-inflationary growth,” Subbarao said in a speech at the London School of Economics in the U.K. capital yesterday.

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

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