India’s Rate Swaps Slump as RBI’s Unscheduled Cut Boosts Bonds

India’s interest-rate swaps slumped the most since October 2013 and sovereign bonds rallied after the Reserve Bank of India reduced interest rates in an unscheduled move for the second time this year.

One-year swaps, derivative contracts used to guard against swings in funding costs, fell 21 basis points to 7.55 percent as of 10:03 a.m. in Mumbai, data compiled by Bloomberg show. The yield on government notes due July 2024 declined nine basis points to 7.66 percent, according to the RBI’s trading system. That’s the biggest decrease since Dec. 2. The rupee snapped a three-day loss.

Governor Raghuram Rajan cut the benchmark repurchase rate to 7.5 percent Wednesday from 7.75 percent. That’s less than a week after Prime Minister Narendra Modi’s government pushed back its fiscal-deficit target in the federal budget to spur economic growth. The RBI acted due to weakness in the economy and after it agreed upon a formal inflation target with the government, Rajan said in a statement. He last cut the rate on Jan. 15.

“Today’s surprise decision shows the RBI’s comfort with the inflation trajectory and its faith in the quality of the fiscal consolidation” being undertaken by the government, said N.S. Venkatesh, the Mumbai-based head of treasury at IDBI Bank Ltd. “The rally in bonds is likely to continue on further rate cuts,” he said, adding that the central bank may lower the repo rate by another 50 basis points by end-2015.

The rupee gained 0.1 percent to 61.8625 a dollar, prices from local banks compiled by Bloomberg show.

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