Indian Bonds Extend Post-Policy Gains on RBI’s Easing Signal

India’s 2023 bonds rose for a third day, with the yield at the lowest level since January, after the central bank signaled it would ease monetary policy if inflation slows faster than targeted.

Reserve Bank of India Governor Raghuram Rajan left the benchmark repurchase rate at 8 percent for a second straight meeting on June 3, as predicted by all 38 economists surveyed by Bloomberg News. The RBI, which sees inflation as measured by the consumer price index at 8 percent in January 2015 and 6 percent a year later, said in its accompanying statement that quicker than anticipated disinflation “will provide headroom for an easing of the policy stance.”

The yield on the 8.83 percent government notes due November 2023 slid six basis points, or 0.06 percentage point, to 8.53 percent in Mumbai, the lowest level since Jan. 20, according to prices from the central bank’s trading system.

“The Reserve Bank of India seems to be turning more accommodative from its hitherto hawkish stance,” Barclays Plc analysts, including Singapore-based Rohit Arora, wrote in a note today. There’s “still room to rally” for Indian fixed-income markets, they wrote.

Benchmark securities due in a decade climbed the most in a year in May on optimism Prime Minister Narendra Modi will boost efforts to curb inflation and revive the economy after his Bharatiya Janata Party won the vote with the biggest majority in 30 years. The 10-year yield will fall to 8.39 percent by year-end, a Bloomberg News survey of 10 banks and mutual funds showed this week after the RBI’s rate decision.

Barclays expects the RBI to cut the key interest rate by 50 basis points in the second half of 2014. Rajan has raised it three times since taking charge in September to rein in consumer-price gains. The CPI rose 8.59 percent in April from a year earlier, the fastest pace among Asia’s top 10 economies.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, slumped six basis points to 8.17 percent, the lowest since July 15 last year, data compiled by Bloomberg show.

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