Rajan Rate-Cut Bets Seen in Lowest Indian Yields Since October

  • February increase in consumer prices smallest in four months
  • Central bank to buy up to 150 billion rupees of notes Thursday

Indian sovereign bonds rose, pushing the 10-year yield to its lowest close since October, as slower inflation boosted odds of an interest-rate cut and the central bank announced more debt purchases.

Consumer prices increased 5.18 percent in February from a year earlier, the least in four months, official data showed after the close of markets Monday. That’s below the 5.52 percent median estimate in a Bloomberg survey. The improvement should pave the way for Reserve Bank of India Governor Raghuram Rajan to lower rates after the government stuck with a plan to narrow the fiscal deficit in its budget, according to Axis Asset Management Co.

An easing will see Rajan join policy makers in Indonesia in lowering benchmark borrowing costs in 2016 as emerging economies look to boost growth at home amid sluggish global demand. Even so, the scope for the Indian central bank chief to add to last year’s 125-basis point reduction in the repurchase rate is limited, given his target to keep inflation within 5 percent by March 2017.

The yield on notes due January 2026 dropped two basis points to 7.58 percent in Mumbai, sliding for a fourth day, according to prices from the RBI’s trading system. That’s the lowest close for benchmark 10-year debt since Oct. 20 and the longest run of declines since July. The yield has slumped 20 basis points from Feb. 26, a day before the budget announcements.

“Inflation has surprised on the downside and that’s improved market sentiment,” said R. Sivakumar, Mumbai-based head of fixed income at Axis Asset, which oversees about 346 billion rupees ($5.1 billion). “Also, the RBI continues to supply liquidity.”

The RBI will buy up to 150 billion rupees of government bonds through open-market operations on March 17, according to a statement. It has been conducting such purchases since December in a bid to tackle a seasonal cash crunch in the banking system. Rajan, who next reviews monetary policy on April 5, has kept the benchmark repurchase rate at 6.75 percent since September.

He said over the weekend the RBI was “comforted" by Prime Minister Narendra Modi’s plan to shrink the budget deficit to 3.5 percent of gross domestic product while telling reporters to "wait and see" how that feeds into monetary policy.

The rupee dropped 0.4 percent, the most in a month, to 67.3850 a dollar, according to prices from local banks compiled by Bloomberg. The currency has weakened 1.8 percent this year in Asia’s worst performance.

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