Bloomberg News

India Bonds Head for Worst Month in a Year on Rate Outlook

June 28, 2013

Indian bonds are poised to post their worst monthly performance in a year on concern the local currency’s plunge to a record low will prevent the central bank from cutting interest rates.

Reserve Bank of India Governor Duvvuri Subbarao kept the repurchase rate steady at 7.25 percent on June 17, citing inflation risks, even as wholesale prices rose at their slowest in nearly four years in May. The rupee touched an all-time low of 60.765 per dollar on June 26 and is headed for its worst quarter since 1992 on worries India’s balance of payments will worsen once the Federal Reserve cuts $85 billion of monthly bond purchases that have driven flows to emerging markets.

“The recent moves in the rupee can put upside pressures on both headline inflation and the fiscal deficit,” Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai, wrote in a research note. “We revise our rate call for the end-July central bank policy meeting from a rate cut of 25 basis points to no cut. We expect no further cuts for the remainder of the year ending March 2014.”

The yield on the 8.15 percent notes due June 2022 slid eight basis points, or 0.08 percentage point, to 7.67 percent as of 10:47 a.m. in Mumbai, according to the central bank’s trading system. The rate has climbed 22 basis points this month, the most since the securities were issued in June 2012.

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the central bank said in its policy statement last week, adding that “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth. The RBI will hold its next rate-setting meeting on July 30.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell six basis points to 7.51 percent, data compiled by Bloomberg show. The rupee tumbled 9.3 percent this quarter, the biggest drop since the three months through March 1992.

To contact the reporter on this story: Shikhar Balwani in Mumbai at

To contact the editor responsible for this story: James Regan at

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