Mumbai: India’s bonds rose for a third day on speculation that a slowdown in inflation and bank-loan growth will allow the central bank to stop increasing borrowing costs.
Ten-year yields, which move inversely to prices, dropped to the lowest in a week on optimism a government report this week will show the inflation rate dropped to the lowest in almost eight months. The Reserve Bank of India has raised interest rates nine times since 2004 to curb credit growth and price gains.
“The economic environment is getting more bond-friendly,” said V. Ravi Kumar, director of treasury at Infrastructure Development Finance Corp. in Mumbai. “The inflation rate is coming down and loan growth is slowing. The central bank probably won’t resort to further monetary tightening.”
The yield on the benchmark 8.07% note due January 2017 fell 2 basis points, or 0.02 percentage point, to 8.1% as of the 5:30pm close in Mumbai, according to the central bank’s trading system. The price rose 0.11, or 11 paise per 100-rupee face value, to 99.79.
The 10-year yield may fall to 7.9% in the coming weeks, Kumar said.
India’s inflation rate may drop to 5.3%, the lowest since September, in the week ended 5 May, according to the median estimate in a Bloomberg survey. Wholesale prices gained 5.66%, the slowest in almost five months, in the week ended 28 April, according to government data.
The inflation rate will be at a “comfortable level” in the next two to three months, Montek Singh Ahluwalia, deputy chairman of the Planning Commission, the investment advisory arm of the government, said on Wednesday. The Reserve Bank expects inflation to slow down to 5% during the current fiscal year to March as increased borrowing costs damp consumer demand.
Indian bank loans fell in the four weeks to 27 April, the longest declining streak in a year, after the central bank raised its overnight lending rate to a four-and-a-half-year high of 7.75% on 30 March.
Bonds’ gains were limited by concern a central bank debt auction will drain cash from the system, leaving investors with less spare funds to buy the securities.
The Reserve Bank sold Rs6,000 crore ($1.47 billion) of the so-called stabilization bonds to remove excess cash from the economy. The average overnight borrowing rate in the money market more than doubled this week, suggesting demand for money increased before the debt sale and making it more expensive to use loans to buy debt.
“We may see bond yields moving slightly higher,” said P. Venkatesh, chief bond trader at state-owned Corporation Bank in Mumbai. “Today’s auction will boost debt supply and reduce liquidity.”
India’s central bank sells debt under the stabilization plan to drain cash from the banking system as it seeks to contain inflation. Weekly gains in the wholesale price index have averaged 6.2% since 1 January, according to government data.
The rate banks charge each other on overnight loans averaged 8.8% this week, compared with 3.9% last week, according to data compiled by Bloomberg.
The cost of India’s interest-rate swaps, derivative contracts used to guard against the risk of an increase in borrowing costs, fell the most in more than a year on speculation that inflation will slow. The five-year swap rate dropped 13 basis points to 7.96%.