India’s sovereign bonds were set for a third weekly gain as inflation at a three-year low fueled optimism the central bank will cut interest rates this month and after the government unveiled measures to curb subsidies.
The wholesale-price index rose 7.18 percent in December from a year earlier, the least since 2009, government data showed this week. Oil companies have been allowed to adjust prices of diesel over a period of time, Oil Secretary G.C. Chaturvedi said in New Delhi yesterday. Finance Minister Palaniappan Chidambaram is seeking to cut fuel subsidies as part of a plan to narrow the budget deficit to 5.3 percent of gross domestic product and avert a sovereign rating downgrade.
“Bonds have rallied as the low inflation number has strengthened speculation of monetary easing,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. (DEVB) in Mumbai. The move to enable refiners to raise state-set diesel prices is also positive for bonds, he said.
The yield on the 8.15 percent bonds due June 2022 fell five basis points, or 0.05 percentage point, this week to 7.82 percent as of 9:27 a.m. in Mumbai, according to the central bank’s trading system. The rate fell two basis points today and touched 7.80 percent on Jan. 14, the lowest level for a benchmark 10-year security since July 2010.
The Reserve Bank of India, which last lowered the repurchase rate by 50 basis points to 8 percent in April, will again cut the rate by 25 basis points to 7.75 percent at a Jan. 29 review, 13 of 16 analysts predicted in a Bloomberg survey this week. The rest expect a reduction to 7.5 percent.
“The repo rate may be cut by 25 basis points this month,” Dash said.
The one-year swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points this week to 7.56 percent in Mumbai, data compiled by Bloomberg show. It fell one basis point today.
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