India 10-Year Yield Drops Most in 3 Weeks as RBI Holds Rates

India’s 10-year bonds jumped, with the yield dropping the most in three weeks, after the central bank unexpectedly left its benchmark interest rate unchanged to support growth.

Governor Raghuram Rajan kept the repurchase rate at 7.75 percent, according to a Reserve Bank of India statement today, an outcome predicted by only five of 31 economists in a Bloomberg survey. The rest expected an increase to 8 percent after wholesale and consumer inflation accelerated last month. Rajan had boosted the rate by 25 basis points in each of the two previous reviews since he took office Sept. 4. The policy decision “is a close one,” the RBI said.

The yield on India’s 8.83 percent sovereign notes due November 2023 slumped 13 basis points, or 0.13 percentage point, to 8.79 percent in Mumbai, according to the central bank’s trading system. That’s the biggest decline for benchmark 10-year debt since Nov. 25. The rate had closed yesterday at its highest level since Nov. 22.

“The RBI’s move has helped arrest the slide in bonds and we could see yields dropping to 8.75 percent in the near term,” Srinivasa Raghavan, Mumbai-based executive vice-president of treasury at Dhanlaxmi Bank Ltd., said by telephone. “If the Federal Reserve too stays away from tapering today, there is scope for yields to decline further.”

Fed Decision

The Fed will decide whether to cut its $85 billion of monthly bond purchases at the end of a two-day meeting today. Some 34 percent of economists surveyed by Bloomberg Dec. 6 predicted the U.S. central bank will start tapering stimulus this month, up from 17 percent in a Nov. 8 poll.

The RBI is “very uncomfortable” with the level of inflation, Rajan had said Dec. 12 after a report showed India’s consumer prices climbed 11.24 percent in November, the most in data compiled by Bloomberg going back to January 2012. Wholesale prices rose 7.52 percent from a year earlier, official data showed Dec. 16, the fastest since September 2012.

The one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, slumped 10 basis points to 8.47 percent, data compiled by Bloomberg show.

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