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Indian bonds rally as RBI signals easing should inflation slow

LiveMint logoLiveMint 03-06-2014 Shikhar Balwani

India’s 2023 bonds rallied after the central bank kept interest rates unchanged for a second straight meeting and signalled it would ease monetary policy if inflation slows faster than anticipated.

The yield on the 8.83% government notes due November 2023 slid six basis points, or 0.06 percentage point, to 8.60% in Mumbai, the lowest level since 21 January, according to prices from the central bank’s trading system.

Reserve Bank of India (RBI) governor Raghuram Rajan left the benchmark repurchase rate at 8% on Tuesday, as predicted by all 38 economists surveyed by Bloomberg News. He has raised the rate three times since taking charge in September to curb price gains. If disinflation is faster than anticipated, it will provide headroom for an easing of the policy stance, the RBI said in a statement on Tuesday.

“The central bank’s tone is much more dovish now than it has been in the last few policy reviews,” said Debendra Kumar Dash, a fixed-income trader at DCB Bank Ltd in Mumbai. “That’s positive for the bond outlook even as the policy overall is on expected lines.”

Further tightening won’t be warranted if consumer-price inflation stays on course to reach 8% in January 2015 and 6% a year later, the central bank said.

Benchmark 10-year bonds rallied the most in a year in May on optimism Prime Minister Narendra Modi will boost efforts to curb inflation and revive the economy after his Bharatiya Janata Party won the vote with the biggest majority in 30 years. India’s consumer prices rose 8.59% in April from a year earlier, the quickest pace among Asia’s top 10 economies.

Rajan lowered the statutory liquidity ratio, or the proportion of deposits banks must invest in government debt and similar approved securities, to 22.5% on Tuesday from 23%. The move will have a marginal impact on demand for bonds, according to IDBI Federal Life Insurance Co.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, slumped 15 basis points from Monday to 8.26%, the biggest drop since October, data compiled by Bloomberg show. Bloomberg

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