Mumbai: Government bonds completed a third weekly gain as crude oil more than halved from its July peak, spurring optimism that inflation will cool.
The benchmark 10-year yields declined to the lowest in almost seven months on speculation the central bank will cut interest rates for the first time in more than five years after inflation slowed to a four-month low.
Measures by the central bank and the government to boost cash at banks lowered the overnight lending rate to a seven-week low, increasing demand for bonds.
“Investors are now pricing in the probability of a cut in interest rates as inflation is showing a slowing trend and growth has been choked off a bit too much,” said Sanjay Arya, treasurer at state-owned Bank of Maharashtra in Mumbai. “That is making fixed-income securities a lot more attractive at present.”
The yield on the benchmark 8.24% note due April 2018 fell 8 basis points this week to 7.72% at close in Mumbai, according to the central bank’s trading system. The price rose 0.52 per Rs100 face amount to Rs103.47. A basis point is 0.01 percentage point.
The 2018 bond yield may decline to 7.5% next week, Arya said.
India’s inflation slowed to a three-month low of 11.44% in the week ended 4 October, government data show.
The Reserve Bank of India on 15 October reduced the amount of deposits lenders must set aside as reserves for the second time in a week and eased restrictions on its lending to banks. It cut the so-called cash reserve ratio to 6.5% from 7.5%. The bank had lowered the cash ratio by 150 basis points last week, the steepest cut since 2001.
India has injected Rs1 trillion through reserve ratio cuts since 11 October as money market rates surged and mutual funds sought government help to meet the highest redemptions by investors this year.
The rate at which banks lend to each other overnight closed at 6.95% the lowest level since 29 August. It had soared to 23% on 10 October, a 19-month high.
Crude oil on Thursday fell $4.69, or 6.3%, to $69.85 a barrel, the lowest settlement since 23 August 2007. Crude traded at $70.48 at 1.29pm London time on the New York Mercantile Exchange.