India Bond Yield Falls to 2-Month Low on Inflation; Rupee Steady

India’s 10-year sovereign bond yield dropped to the lowest level since October on speculation the central bank will refrain from raising borrowing costs as inflation slows. The rupee was little changed.

Wholesale prices increased 6.16 percent last month from a year earlier, the smallest gain since July, official data showed yesterday. The Reserve Bank of India unexpectedly left its benchmark repurchase rate at 7.75 percent in December after boosting it twice since September.

“I don’t expect the RBI to raise rates this month due to weak inflation numbers,” said Mumbai-based Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. “That’s supporting bonds.”

The yield on the 8.83 percent securities maturing in November 2023 fell two basis points, or 0.02 percentage point, to 8.62 percent in Mumbai, according to the central bank’s trading system. That’s the lowest level for benchmark 10-year debt since Oct. 30.

India will pare its budget deficit to below this year’s target after curbing spending, boosting the chances of averting a credit-rating cut, according to two Finance Ministry officials with direct knowledge of the matter. They asked not to be identified as the projections aren’t public.

Rupee

The rupee was little changed at 61.5425 per dollar, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, dropped three basis points to 8.49 percent.

The median estimate for wholesale prices in a Bloomberg survey was for a 6.99 percent advance. Consumer price gains were 9.87 percent, lower than the 10.06 percent forecast, while industrial production shrank 2.1 percent in November, separate reports showed over the past few days. The next RBI policy review is due Jan. 28.

Three-month offshore non-deliverable forwards were steady at 62.70 per dollar, data compiled by Bloomberg show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose one basis point to 8.31 percent, data compiled by Bloomberg show.

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