India’s 10-Year Bond Yield Holds Near a Three-Week Low

India’s 10-year sovereign bond yield held near a three-week low on speculation the government will succeed in curbing the fiscal deficit, paving the way for the central bank to cut interest rates.

Reserve Bank of India Governor Raghuram Rajan, who left borrowing costs unchanged on Feb. 3 after an unscheduled cut in January, has said that further easing of monetary policy will depend on sustained fiscal consolidation. Prime Minister Narendra Modi’s administration has pledged to limit the budget shortfall to a seven-year low of 4.1 percent of gross domestic product in the fiscal year ending March 31. The rupee dropped.

“The market is quite positive that the government will be able to keep the deficit under check,” N.S. Venkatesh, the Mumbai-based head of treasury at IDBI Bank Ltd., said by phone. The federal budget on Feb. 28 will target a shortfall of 3.6 percent of GDP for the next fiscal year, and “that will enable the RBI to further reduce rates,” he said.

The yield on the sovereign bonds due July 2024 was little changed at 7.70 percent close in Mumbai, prices from the RBI’s trading system show. The rate declined to 7.65 percent on Feb. 2, the lowest close for benchmark 10-year debt since July 2013.

Modi’s government has scrapped controls on diesel prices, raised natural gas tariffs and allowed more foreign investment in industries such as defense since taking the reins of Asia’s third-largest economy in May. The administration is also selling stakes in state-run companies to meet the deficit goal.

The rupee fell 0.2 percent to 62.3150 a dollar, according to prices from local banks compiled by Bloomberg. The currency has climbed 1.2 percent in 2015, the best performance in Asia.

(Corrects to say yield near a three-week low in headline and the rupee fell in third paragraph in story originally published Feb. 23.)
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