India’s Swap Rate Drops to Two-Year Low on Rate-Cut Speculation

India’s one-year interest-rate swaps fell to a two-year low on speculation weak economic growth will prompt the central bank to lower borrowing costs for a third time in 2013. The rupee strengthened.

The cost to lock in rates for one year fell seven basis points this month after a purchasing managers’ index released April 1 showed manufacturing growth slowed to a 16-month low in March. Reserve Bank of India Governor Duvvuri Subbarao last cut the repurchase rate by 25 basis points to 7.5 percent on March 19 and said the room for further easing was limited. The next policy review is scheduled for May 3.

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 7.40 percent in Mumbai, data compiled by Bloomberg show. The rate was the lowest since April 4, 2011.

“Growth continues to be a concern,” said Mahendra Jajoo, who oversees $374 million of assets as chief investment officer at Pramerica Asset Manager Pvt. in Mumbai. “Inflation is expected to ease as global commodity prices have come down.” He predicts the central bank will further cut the repurchase rate by a maximum of 50 basis points this year.

Consumer price gains slowed to 10.70 percent from a year earlier in March from almost 11 percent in February, while wholesale prices rose 6.3 percent, the least in 40 months, according to separate Bloomberg surveys before data due this week and next. Brent crude oil has retreated 12 percent from this year’s high of 118.90 touched in February. Oil comprises about 35 percent of India’s total imports.

‘Expectation Management’

Industrial output shrank 1.2 percent in February, according to a separate survey before a report due April 12. Asia’s third-largest economy probably expanded 5 percent in the year ended March 31, which would be the least since 2003, the Central Statistical Office predicted in February.

“The RBI guidance has a lot to do with expectation management,” said Siddhartha Sanyal, the Mumbai-based chief India economist at Barclays Plc. “But the actual situation regarding growth is pretty weak and this will ultimately lead to further softening.”

The yield on the 8.15 percent government bonds due June 2022 rose two basis points, or 0.02 percentage point, to 7.90 percent, according to the central bank’s trading system.

The local currency strengthened on optimism unprecedented monetary easing by Japan will boost inflows into emerging market assets.

The rupee rose 0.1 percent to 54.5250 per dollar in Mumbai, data compiled by Bloomberg show. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, fell nine basis points to 7.75 percent.

Three-month onshore rupee forwards traded at 55.58 per dollar, compared with 55.68 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.45 versus 55.58. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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