Bloomberg News

India Swaps at Eight-Week High as Rupee Fall Dims Rate-Cut Odds

June 13, 2013

India’s interest-rate swaps rose to an eight-week high on speculation the rupee’s slump will stoke inflation, reducing the scope for cutting borrowing costs.

Eleven of 19 economists in a Bloomberg survey predict the Reserve Bank of India will keep the benchmark repurchase rate unchanged at 7.25 percent at a policy review on June 17. Eight forecast a 25 basis-point cut. The rupee has dropped 6.7 percent this quarter, making it Asia’s worst performer. It touched a record low of 58.9850 per dollar on June 11.

“The sharp depreciation of the rupee since May would offset the impact of low domestic inflation by high imported inflation, at least in the short term,” Anand Rathi Financial Services Ltd. economists including Sujan Hajra wrote in a research note. “Therefore, we expect the central bank to be in a wait-and-watch mode in the June review.”

The one-year swap, a derivative contract used to guard against fluctuations in funding costs, climbed one basis point, or 0.01 percentage point, to 7.27 percent as of 9:34 a.m. in Mumbai, according to data compiled by Bloomberg. That is the highest level since April 17.

The RBI has reduced the repurchase rate 75 basis points this year to 7.25 percent. Wholesale prices rose 4.87 percent in May, the slowest pace in 42 months, according to the median estimate in a Bloomberg survey of 34 economists before data due tomorrow.

In a bid to attract more capital and limit the rupee’s losses, the central bank said yesterday long-term investors, including sovereign-wealth funds, multilateral agencies and global central banks, can buy $5 billion more of Indian sovereign debt. The cap now stands at $30 billion, compared with $25 billion earlier.

The yield on the benchmark 8.15 percent government bonds due June 2022 rose two basis points to 7.53 percent, according to the central bank’s trading system.

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net


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