India’s Bonds Rally as Low Inflation Spurs Rate-Cut Speculation

India’s bonds rallied, pushing the 10-year yield to a 13-month low, on speculation slower inflation amid a drop in global crude oil prices will allow the central bank to cut borrowing costs.

The nation imports about 80 percent of its oil needs and a 23 percent slump in Brent crude since the end of June has contributed to consumer prices rising at the slowest pace since 2012. Indian Oil Corporation Ltd. said last week it will reduce the retail gasoline prices effective from today.

The yield on the 8.4 percent sovereign notes due July 2024 fell two basis points, or 0.02 percentage point, to close at 8.26 percent in Mumbai, the lowest level for benchmark 10-year debt since September 2013, according to prices from the central bank’s trading system.

“The drop in commodity prices is giving the overall comfort that inflation will be under control,” said Harish Agarwal, a fixed-income trader at FirstRand Ltd. in Mumbai. “The markets are positioning for a rate cut early next year.”

The yield had dropped to as low as 8.22 percent during the session and pared gains after the central bank announced conducting open-market sales of bonds worth 100 billion rupees ($1.6 billion), the RBI said in a statement.

Reserve Bank of India Governor Raghuram Rajan has kept the benchmark repurchase rate at 8 percent after three increases from September 2013 through January. With inflation stabilizing, it’s time to start reducing borrowing costs, Finance Minister Arun Jaitley said in an interview with the Times of India newspaper published Oct. 25.

An index of consumer prices rose to 6.46 percent from a year earlier in September, official data show.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell six basis points to 8.05 percent, according to data compiled by Bloomberg. The rupee slipped less than 0.1 percent to 61.4150 per dollar, according to prices from local banks compiled by Bloomberg.

Three-month offshore non-deliverable forwards in the rupee were little changed at 62.26 per dollar. Forwards are agreements to buy or sell assets at a set price and date, and non-deliverable contracts are settled in dollars.

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