Indian Swaps Decline for Fifth Week as RBI Forecast to Cut Rates

India’s one-year interest-rate swaps completed a fifth weekly decline on speculation cooling inflation will give the central bank room to cut interest rates.

Twenty one of 25 analysts in a Bloomberg News survey predict the Reserve Bank of India will reduce its repurchase rate by 25 basis points to 7.25 percent at a review on May 3, while three forecast no change. One expects a 50 basis point cut. Wholesale prices rose 5.96 percent in March from a year earlier, the slowest pace since November 2009.

“Softening inflation will give the central bank comfort to cut rates,” said Shubhada Rao, Mumbai-based chief economist at Yes Bank Ltd. “Moderation in gold and oil prices will further ease inflation and diminish concerns about the current-account deficit. That will give the RBI room to follow up with another rate cut after May 3.”

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, fell five basis points, or 0.05 percentage point, this week to 7.22 percent, according to the central bank’s trading system. It fell two basis points today. The fixed cost to lock in interest rates for a year touched 7.21 percent on April 23, the lowest level since January 2011.

Reserve Bank Governor Duvvuri Subbarao cut the repo rate by 50 basis points in the first quarter to help revive Asia’s third-largest economy. The nation’s gross domestic product rose 5 percent in the fiscal year ended March 31, the weakest pace since 2003, the statistics agency estimates.

Oil, Gold

Brent crude oil has declined 6.6 percent this month, while gold lost more than 8 percent. India is the world’s top bullion buyer and fourth-largest oil consumer, with imports contributing to a record $32.6 billion current-account deficit in the last quarter of 2012.

Easing inflation “increases the probability of a more accommodative monetary policy,” Raghuram Rajan, the top adviser in the Finance Ministry, said in an April 16 interview.

India, the world’s second-biggest rice, wheat and sugar cane grower, may get above-average monsoon rainfall for the third time in four years in 2013, boosting crop harvests and curbing retail food prices.

Rain will be 98 percent of a 50-year average of 89 centimeters (35 inches) in the four months through September, Earth Sciences Minister S. Jaipal Reddy told reporters in New Delhi today. The bureau, which defines normal precipitation as 96 percent to 104 percent of the long-term average, will issue a detailed forecast in June, Reddy said.

Government bonds gained this week. The yield on the benchmark 8.15 percent notes due June 2022 fell 3 basis points this week to 7.74 percent, according to the central bank’s trading system.

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