India Bonds Gain as RBI May Slow Rate Increases on Europe Woes

June 2 (Bloomberg) -- India’s bonds rose on speculation the central bank will refrain from raising interest rates before its next policy meeting in July as Europe’s debt crisis threatens to damp the global economic recovery.

Yields on 10-year notes fell to their lowest level in a week after the European Central Bank said in a May 31 report the region’s banks may have to write off $237 billion of bad debt by 2011. Reserve Bank of India Deputy Governor Subir Gokarn said last month that rates will be tightened at a “cautious” pace because of Europe’s fiscal troubles.

“Investors are more or less convinced the central bank may increase rates slowly as they want to balance growth and inflation,” said Mukesh Kumar, a fixed-income trader with State Bank of Bikaner & Jaipur in Mumbai. “The overall sentiment is positive for bonds now.”

The yield on the 7.80 percent note due May 2020 fell one basis point to 7.50 percent as of the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price rose 0.08 per 100 rupee face amount, or 8 paise, to 102.06.

India’s central bank raised its benchmark rate in March and April by a quarter percentage point each to the current level of 3.75 percent.

Fitch Ratings on May 28 stripped Spain of its AAA credit grade, saying the nation’s debt burden may weigh on economic growth. Greek Prime Minister George Papandreou has announced three rounds of deficit-reduction measures this year, spurring violent protests against cuts to wages and pensions. An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, according to the European Commission.

The cost of India’s five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed. The rate, a fixed payment made to receive floating rates, was at 6.51 percent, compared with 6.50 percent yesterday, according to data compiled by Bloomberg.