Bonds leap as RBI expected to hold rates

Bonds leap as RBI expected to hold rates

Mumbai: The 10-year government bonds were near the highest level in almost three months after the Reserve Bank of India (RBI) said three years of interest rate increases are containing inflation, signalling that borrowing costs may be kept unchanged.

Yields fell on speculation that RBI will keep its policy rates unchanged when governor Yaga Venugopal Reddy meets fellow policymakers on Tuesday to review monetary policy, according to a Bloomberg survey. Reddy has raised rates to a five-year high of 7.75%, helping slow inflation to its lowest since 2002.

“I think rates have peaked and we have seen the impact on bond yields and inflation," said S. Srikumar, chief of fixed income at state-owned Andhra Bank in Mumbai. “The worst probably is over for now and yields should begin declining."

The yield on the 7.99% note due July 2017 fell 1 basis point to 7.81% at close in Mumbai, according to the central bank’s trading system.

The price rose Re0.06 per Rs100 face value, to Rs101.16. A basis point equals 0.01 percentage point.

RBI will hold its overnight borrowing rate at 6% and leave its lending rate untouched at 7.75%, according to 19 out of the 22 analysts in the Bloomberg survey.

Of the analysts who took part in the survey, 15 expect no change in the level of reserves lenders must set aside mandatorily. RBI’s decision is due at noon in Mumbai on Tuesday.