India Bond Yield at One-Year Low as Oil Drop Cuts Inflation Risk

India’s government bonds rose, pushing the 10-year yield to a one-year low, on speculation a decline in global oil prices will aid central bank efforts to curb inflation.

Brent crude has dropped about 3 percent in October, reducing the risk of rising consumer prices in India, which imports about 80 percent of its oil. Reserve Bank of India Governor Raghuram Rajan, who left the repurchase rate unchanged for a fourth meeting on Sept. 30, has raised it three times since last September to rein in the fastest inflation in Asia.

The yield on the 8.4 percent bonds due July 2024 slid five basis points, or 0.05 percentage point, to 8.41 percent in Mumbai, according to prices from the central bank’s trading system. That’s the lowest level for benchmark 10-year debt since September last year, data compiled by Bloomberg show.

“The decline in crude is certainly aiding sentiment, but we need to see how long this party lasts,” said Harihar Krishnamoorthy, treasurer at the Indian unit of FirstRand Ltd. in Mumbai. “We continue to see 8.4 percent to 8.6 percent as a fair range for the 10-year yield.”

Consumer-price inflation was 7.8 percent in August, down from as high as 11.16 percent last November, official data show. While the near-term inflation outlook is balanced “with a slant to the downside,” risks to the RBI’s target of limiting price gains to 6 percent by January 2016 are “still to the upside, though somewhat lower than in the last policy statement” in August, the central bank said Sept. 30.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, dropped four basis points to 8.38 percent, the lowest in two months, data compiled by Bloomberg show. India’s borrowing costs declined at an auction of treasury bills today.

“Oil is definitely one factor, but the market is also benefiting from increased demand for debt as there’s ample cash supply in the financial system,” said Debendra Kumar Dash, a fixed-income trader at DCB Bank Ltd. in Mumbai.

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