Mumbai: India’s 10-year bonds gained for a second day on speculation that the central bank will keep interest rates unchanged at its meeting on Tuesday.
Benchmark yields have retreated from a 10-month high on optimism that borrowing costs at a six-year high now are enough to cool inflation, said Kamlesh Chand, a fixed-income trader at IndusInd Bank Ltd. The Reserve Bank of India told banks to set aside more money in reserves on 17 April, reducing the need for an interest-rate increase.
“I think the central bank will wait for more data,” Mumbai-based Chand said. “The measures taken recently will take a while to have an impact. I expect yields to fall from here.”
The yield on the 8.24% note due April 2018 fell 1.8 basis points to 8.14% at the 5:30pm close in Mumbai, according to the central bank’s trading system. The price rose Re0.12, or 12 paise per 100-rupee face amount, to Rs100.70.
The 10-year yield may fall to 8.1% this week, Chand said.
Inflation, stoked by rising oil and food prices, accelerated to 7.41% in the last week of March from a year earlier, a three-and-a-half-year high, before easing to 7.33% in the week ended 12 April, government data show.
The central bank may keep the repurchase rate at 7.75%, nine of 20 economists in a Bloomberg survey said. The rest predict a quarter-percentage point increase.
The government has scrapped import duty on edible oils and maize, and banned exports of rice, pulses and cement. On its part, the central bank raised the reserve ratio six times since December 2006 to a seven-year high of 8%.
The government’s attempts may help stem inflation, the central bank said in a report on Monday.
“These measures are expected to help in containing inflation and inflationary expectations,” the Reserve Bank said in its report on the economy issued in Mumbai ahead of its quarterly monetary policy. “Inflation risks on account of oil prices remain incipient.”
Finance minister P. Chidambaram, who expects a global slowdown to drag India’s expansion to about 8% in the current fiscal year, less than the record average pace of 8.7% in the previous five years, said on 28 March that his government may settle for slower growth in its fight against inflation.
Gains in bonds were moderated by speculation that record high crude oil prices would push up the inflation rate that has already more than doubled in the past four months. India imports three-quarters of its annual energy needs.
“The trend in oil prices is clearly suggesting that it will continue to exert pressure on inflation in the near term,” said Suresh Pai, chief of fixed-income trading at state-owned Canara Bank in Mumbai. “So, the sentiment in the debt market will remain bearish and yields will rise.”
Crude oil touched $119.93 (Rs4,821.19) a barrel on the New York Mercantile Exchange on Monday, the highest since futures began trading in 1983. It has risen 24% this year.