India 10-Year Bond Yield Near Two-Week Low on Inflation Optimism

India’s 10-year bond yield held near a two-week low on speculation inflation will cool, easing pressure on the central bank to raise interest rates.

The Reserve Bank of India surprised economists by leaving the benchmark repurchase rate at 7.75 percent on Dec. 18 even after official data showed wholesale prices climbed 7.52 percent in November from a year earlier, the fastest since September 2012. The decision to hold rates was “a close one,” the central bank said in its policy statement. Standard Chartered Plc says the RBI will leave policy rates unchanged at its January policy meeting, revising its outlook for local bonds to positive from neutral.

The yield on the 8.83 percent sovereign notes due November 2023 rose one basis point, or 0.01 percentage point, to 8.79 percent in Mumbai, according to the central bank’s trading system. The rate slid 13 basis points last week and five basis points yesterday to the lowest level since Dec. 19.

Consumer prices and wholesale prices “likely eased sharply in December,” Standard Chartered analysts Nagaraj Kulkarni and Anubhuti Sahay wrote in a report dated yesterday, cutting their December CPI inflation forecast to 10 percent from 10.4 percent and the WPI estimate to 6.95 percent from a range of 7-7.25 percent. They cited “improving inflation dynamics, expectations of stable policy rates” among reasons for their view.

Local consumer prices rose 11.24 percent in November, the fastest in data compiled by Bloomberg going back to January 2012. Bonds due in a decade capped their biggest annual loss since 2009 on Dec. 31, with yields rising 78 basis points, as overseas funds cut holdings of local debt by about $8 billion in 2013 before the U.S. plan to taper monetary stimulus.

Fiscal Deficit

RBI Governor Raghuram Rajan has raised interest rates twice since taking office in September to counter price pressures. India will release consumer inflation data for December on Jan. 13 while WPI figures will be announced Jan. 14.

Ten-year yields declined yesterday after the nation raised fuel prices, helping the government avoid an increase in energy subsidies that would worsen the budget deficit. The budget deficit reached 94 percent of the full-year target in the first eight months of the year ending March 31, according to the latest official figures.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, climbed three basis points to 8.43 percent, data compiled by Bloomberg show.

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