India’s Swaps at One-Month High as Rate-Cut Speculation Dashed

India’s interest-rate swaps rose to a one-month high on speculation the rupee’s slump to a record will give the central bank less scope to cut borrowing costs.

Reserve Bank of India Governor Duvvuri Subbarao said last week the balance of payments is under stress and retail inflation is still high. Eleven of 18 economists in a Bloomberg survey predict no change in the repurchase rate at a policy review next week. Eight forecast a 25 basis point cut. The RBI reduced the repurchase rate in May, March and January by a combined 75 basis points to 7.25 percent.

“The recent rupee weakness reduces the probability of a rate cut at the June 17 monetary policy meeting,” Barclays Plc analysts including Rohit Arora wrote in a research note today.

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, climbed one basis point, or 0.01 percentage point, to 7.25 percent as of 9:27 a.m. in Mumbai, according to the central bank’s trading system. That is the highest level since May 8.

Swaps have priced in a reduction in interest rates by a total of 50 basis points, according to Barclays. “Should the RBI pause, the next opportunity to cut rates will be July 30, a long time in the current market environment,” it said.

Record Low

The rupee declined 0.4 percent to 58.39590 per dollar and reached an all-time low of 58.9850. The currency pared losses after the government said it is considering options including an overseas bond sale to spur fund inflows and on speculation the central bank sold dollars. It’s Asia’s worst-performing currency over the past month with a loss of 6.2 percent.

The nation is weighing measures including a sovereign bonds and a debt offering to citizens living abroad to attract investment and offset a record current-account deficit, Raghuram Rajan, the top adviser at the finance ministry, told reporters in New Delhi today.

The rupee will weaken beyond 60 in a sustained manner, Rajeev Malik, a Singapore-based economist at CLSA Asia-Pacific Markets, said in an e-mail.

The yield on the benchmark 8.15 percent government bonds due June 2022 rose four basis points to 7.53 percent, the highest level since May 13, according to the central bank’s trading system.