Indian Bonds Post Weekly Gain as Oil Drop Seen Easing Inflation

Ten-year sovereign bonds rose this week, snapping a two-week decline, as plunging oil prices reduced India’s inflation risk and led to optimism the central bank will lower interest rates.

Brent crude traded near its lowest closing price since mid-2009 after sinking 48 percent in 2014 as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share amid a supply glut. Ten-year notes, which capped their biggest annual advance since 2008 on Dec. 31, will extend gains this year as the Reserve Bank of India embarks on the most aggressive policy easing in five years, a Bloomberg survey showed this week.

The yield on the 8.4 percent securities due July 2024, the current 10-year benchmark, slid 11 basis points, or 0.11 percentage point, from Dec. 26 to 7.87 percent in Mumbai, prices from the RBI’s trading system show. That’s the biggest weekly drop since the five days ended Dec. 12. The rate fell one basis point today. The rupee advanced this week.

“Expectations of an interest-rate cut have buoyed the bond markets,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai. “Oil prices continue to improve the inflation outlook for India.”

Plunging oil cut costs for Asia’s third-largest economy as India imports about 80 percent of its oil. The consumer price index rose 4.38 percent in November, the least since it was created in early 2012, allowing RBI Governor Raghuram Rajan to pause after raising the benchmark repurchase rate three times from September 2013 to January 2014 to 8 percent.

Swap traders are pricing in rate cuts. The fixed payment to lock in rates for a year using the derivatives dropped 11 basis points this week and one basis point today to 7.77 percent. It slid 70 basis points in 2014, the most since 2008.

Rupee Gains

In the currency market, the rupee snapped a three-week losing streak, advancing 0.4 percent from Dec. 26 and 0.1 percent today to 63.2950 a dollar, according to prices from local banks compiled by Bloomberg. The currency weakened 2 percent in 2014, completing a fourth annual loss on Dec. 31, the longest run of declines since 2001.

One-month implied volatility in the rupee fell 64 basis points this week and 20 basis points today to 7.03 percent, data compiled by Bloomberg show. The rate climbed as high as 7.52 percent earlier in the day.

Three-month offshore non-deliverable forwards for the rupee rose 0.5 percent to 64.41 a 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. They were little changed today.

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