Indian Bond Yields Show Traders Pared Rate-Cut Bets, ICICI Says

Jan. 27 (Bloomberg) -- Indian bond yields, which have rebounded from a record low touched earlier this month, indicate traders have scaled back bets for an interest-rate cut, according to ICICI Securities Ltd.

The Reserve Bank of India may today opt for a pause in reductions as policy makers consider past measures as sufficient to bolster the economy, said Prasanna Ananthasubramaniam, an analyst at the Mumbai-based primary dealer that underwrites government debt sales. Ten-year yields touched an all-time low of 4.85 percent on Jan. 5 as the central bank cut its benchmark rate four times in less than three months. Yields have jumped almost one percentage point since.

“The rebound in yields suggests the bond market has priced in a no-rate cut scenario for today,” Prasanna said. “The aggressive monetary easing of recent months suggests the RBI frontloaded its rate cuts and may now wait for results before more action. Recent government comments support this view.”

Yields on 10-year government debt have risen to 5.72 percent and are headed for the first monthly increase since July, according to the central bank’s trading system. They climbed 48 basis points, or 0.48 percentage point, this month, after dropping 1.82 percentage points in December.

“I don’t see bonds rallying much further in the near term,” Prasanna said. “We may see the 10-year yield move mostly between 5.75 percent and 6 percent in the coming weeks.”

Rate Survey

Eleven of 22 economists surveyed by Bloomberg News expect the central bank to hold the overnight lending rate, or the repurchase rate, at 5.5 percent, with the rest expecting a reduction. A separate survey shows 14 of 21 economists expect no change in the reverse-repurchase rate at which the central bank drains funds from the banking system. The rate decision is due at noon in Mumbai.

Central bank Governor Duvvuri Subbarao lowered the overnight lending and borrowing rates to 5.5 percent and 4 percent respectively on Jan. 2, both record lows. The central bank has cut its lending rate, the repurchase rate, by 3.5 percentage points since Oct. 20. It also reduced the so-called cash reserve ratio, or the proportion of deposits banks must set aside as reserves, by 4 percentage points to 5 percent.

Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, said on Jan. 21 measures taken recently by policy makers were enough to revive an economy expected to expand at the slowest pace in six years.

Stimulus Packages

India has unveiled two stimulus packages to counter the effect of the global economic slump on Asia’s third-biggest economy. Growth has slowed for two straight quarters, and the government is forecasting an expansion of 7 percent this fiscal year, the weakest since 2003.

Volatility in India’s bonds may remain near a record touched this month as the economy slows and the government increases debt sales, according to ICICI.

“The bond market is in a phase of high volatility as supply pressure and the weak economic outlook are posing a conundrum,” Prasanna said.

The 30-day historical volatility gauge of the Indian 10- year government bond yield surged to an all-time high of 61.3 percent on Jan. 23, more than doubling from a month earlier. The swing in yields between opening and closing levels on Jan. 7 was a half-percentage point.

India raised its borrowing target for the year ending March 31 to more than 2 trillion rupees ($40.9 billion), from 1.45 trillion rupees set in its budget for the period.