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Benchmark bond yields at four-month low on rate outlook

LiveMint logoLiveMint 04-06-2014 Divya Patil

Mumbai: Indian 10-year government bonds rose, pushing the yield to a four-month low, after the central bank signalled it would ease monetary policy if consumer-price gains slow more than anticipated.

Should disinflation be faster than expected, it will provide headroom for an easing of the policy stance, the Reserve Bank of India (RBI) said in a statement Tuesday after it left the repurchase rate at 8%, as predicted by all 38 economists surveyed by Bloomberg. The rupee gained as foreign banks sold dollars on behalf of foreign institutional investors (FIIs), according to Mecklai and Mecklai Ltd.

“The statement from the RBI that there is headroom to ease if inflation slows is driving bonds higher,” said Paresh Nayar, the Mumbai-based head of currency and money markets at FirstRand Bank Ltd. Tuesday’s statement highlights a possibility of rate cuts.

The yield on the 8.83% government notes due November 2023 declined one basis point, or 0.01 percentage point, to 8.59% in Mumbai, according to prices from the central bank’s trading system. It fell to 8.57% during the day, the lowest level since 21 January.

Tightening won’t be warranted if consumer-price inflation stays on course to slow to 8% in January 2015 and 6% a year later, the RBI said. Consumer-price inflation has stayed below 9% for the first four months of the year after topping 11% in November, official data show.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, declined three basis points to 8.23%, data compiled by Bloomberg show.

The rupee advanced 0.1% to 59.3350 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, slipped seven basis points to 7.2150%, data compiled by Bloomberg show.

Three-month offshore non-deliverable forwards were little changed at 60.23 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. Bloomberg

Manish Modi in New Delhi contributed to this story.

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