Bloomberg News

India 10-Year Bond Yield at One-Month Low After Inflation Eases

July 16, 2012

India’s 10-year bonds gained, pushing the yield to a one-month low, on speculation the central bank will cut interest rates after inflation unexpectedly eased in June.

The benchmark wholesale-price index rose 7.25 percent from a year earlier, after climbing 7.55 percent in May, the commerce ministry said in a statement in New Delhi today. The median of 36 estimates in a Bloomberg News survey was for a 7.61 percent gain. The Reserve Bank of India, which lowered interest rates in April for the first time since 2009, is scheduled to review policy on July 31.

“The unexpected slowdown of inflation is fantastic news,” Dariusz Kowalczyk, a strategist at Credit Agricole CIB in Hong Kong, wrote in an e-mailed statement. “We expect a 25 basis point cut in rates at the RBI meeting.”

The yield on the 8.15 percent notes due June 2022 fell five basis points, or 0.05 percentage point, to 8.05 percent in Mumbai, according to the central bank’s trading system. The rate is the lowest for a benchmark 10-year bond since June 15.

The RBI reduced its repurchase rate by 50 basis points to 8 percent in April, after raising it by a record 375 basis points through 2010 and 2011. Governor Duvvuri Subbarao held the repo rate at 8 percent at a meeting on June 18.

Inflation Risks

The economy expanded 5.3 percent in the three months through March, the slowest pace in nine years. Brent crude has fallen 11.8 percent in the past year to $102.64 a barrel, according to data compiled by Bloomberg.

“Evidently inflation pressure has eased somewhat in recent months with the slowing of growth and decline in global commodity prices,” said Deutsche Bank economists Taimur Baig and Kaushik Das in a research note.

The central bank may keep interest rates unchanged at this month’s policy review, the Deutsche Bank economists said, citing the rupee’s weakness and a “poor” monsoon.

The local currency has depreciated 4.1 percent this year, the worst performing major currency in Asia, according to data compiled by Bloomberg.

Monsoon, which accounts for more than 70 percent of India’s annual rainfall, was 22 percent below a 50-year average since June 1, the weather bureau said yesterday.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, was unchanged at 7.53 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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