Ten-year notes had the biggest gain in three weeks after the Reserve Bank of India said inflation has been contained by interest rate increases and import duty cuts in the past three years. That suggests RBI governor Yaga Venugopal Reddy may not raise borrowing costs further when he announces the quarterly monetary policy. He may unveil measures such as raising the cap on the cash it drains each day.
We have a specific issue of liquidity to be addressed and not a bigger problem of inflation, said Prasanna Patankar, chief bond trader based in Mumbai at Securities Trading Corp of India Ltd, a primary dealer that underwrites government debt. The expectation is that there wont be any monetary steps taken as of now. That will keep the outlook for bonds positive.
The yield on the benchmark 7.49% note due April 2017 fell 8 basis points, or 0.08 percentage points, to 7.76%, according to the central banks trading system. That was the biggest decline in the yield, which moves inversely to prices, since July 9.
The price rose 0.52, or 52 paise per 100 rupee face value, to 98.18. Bond yields move inversely to prices. The central bank will keep its key repurchase rate at 7.75% at Tuesdays meeting, according to a Bloomberg News survey of economists.
Pre-emptive monetary measures since mid-2004 accompanied by fiscal and supply-side measures have helped in containing inflation, the central bank said in a report released on the economy on the eve of its monetary policy review.
Wholesale price-based inflation quickened to 4.41% in the week ended July 14, from 4.27% the previous week, the government said July 27. That was the eighth week inflation remained below the central banks target of 5% for fiscal year that began on April 1. Surplus rupees in the system increased as the central bank bought dollars to stem currency gains and help exporters.
Meanwhile, Indias rupee held at the weakest in almost a month on speculation overseas investors will sell local stocks and prefer to buy safer securities.
The rupee closed at 40.535 against the dollar, the lowest since July 3, versus 40.53 on July 27, according to data compiled by Bloomberg.