Mumbai: The 10-year bonds rose for a fifth day, pushing yields to the lowest level since April 2005, on speculation slowing growth and inflation will add pressure on the central bank to lower borrowing costs.
Rising speculations: The RBI building in New Delhi. The bank is likely to cut the key overnight lending rate by 1.5 percentage points to 6%. Ramesh Pathania / Mint
Wholesale prices gained 8.98% in the week ended 22 November from a year earlier, compared with 8.84% in the previous week, according to the median estimate in a Bloomberg News survey of economists. Inflation touched a 16-year high of 12.91% in August.
The Reserve Bank of India (RBI) is likely to cut the key overnight lending rate by as much as 1.5 percentage points to 6%, ‘The Economic Times’ reported on Wednesday citing an official it didn’t identify.
With inflation cooling, there’s increasing expectation that the government will do everything possible to bolster growth, said Pradeep Madhav, chief operating officer in Mumbai at Securities Trading Corp. of India, a primary dealer that underwrites government debt sales. We may see some measures, possibly a rate cut, as early as this weekend.
The yield on the 8.24% note due April 2018 dropped 23 basis points to 6.78% in Mumbai, according to the central bank’s trading system. The price climbed 1.62 per 100-rupee face amount to 110.01. One basis point is one-hundredth of a percentage point.
Bonds also rose after an increase in subscriptions as the central bank’s daily money auctions showed banks have more spare cash to buy debt. Bids at RBI’s reverse-repurchase auction totalled Rs56,600 crore on Wednesday, the most since April.
The cost of five-year interest-rate swaps, or derivative contracts used to guard against rate fluctuations, fell to the lowest since May 2004. The rate, a fixed payment made to receive floating rates, was at 5.265%, down from 5.895% on Tuesday.
The cost to receive floating-rate payments for five years is 1.49 percentage points below similar-maturity government bond yields, indicating traders expect borrowing costs to fall. The spread reached a record 1.65 percentage points on 21 November, almost quadrupling this quarter.