Indian Bonds Rally as Lower Inflation Spurs Rate-Cut Optimism

Indian bonds rallied, pushing the 10-year yield to a 13-month low, after Finance Minister Arun Jaitley called for lower borrowing costs as inflation eases.

The time seems to have come for the Reserve Bank of India to reduce interest rates as inflation is stabilizing, Jaitley said in an interview with the Times of India newspaper on Oct. 25. India imports about 80 percent of its oil needs, and a 24 percent slump in Brent crude since the end of June contributed to consumer-price gains slowing to 6.46 percent last month, the least since 2012.

“Recent developments are pointing toward a cut in interest rates,” said Debendra Kumar Dash, a fixed-income trader at DCB Bank Ltd. in Mumbai. “When inflation is coming off and growth is tepid, it gives the RBI room to cut rates.”

The yield on India’s 8.4 percent sovereign notes due July 2024 fell four basis points, or 0.04 percentage point, to close at 8.32 percent in Mumbai, the lowest for benchmark 10-year debt since September 2013, according to prices from the central bank’s trading system. The rupee fell less than 0.1 percent to 61.3050 per dollar, prices from local banks compiled by Bloomberg show.

The RBI may consider easing monetary policy as early as March after global crude prices fell to a four-year low this month, Ashima Goyal, a member of the central bank’s technical advisory committee, said Oct. 20.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell two basis points to 8.02 percent, according to data compiled by Bloomberg. The RBI has kept its repurchase rate at 8 percent after three increases from September 2013 through January this year.

Three-month offshore non-deliverable forwards on the rupee fell 0.3 percent to 62.19 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in the greenback.

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