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Bonds gain again ahead of RBI policy review

Benchmark government bonds completed a second weekly gain on speculation the central bank will refrain from increasing interest rates by more than 25 basis points next week.

ET Bureau|
Jan 22, 2011, 06.08 AM IST
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India’s benchmark government bonds completed a second weekly gain on speculation the central bank will refrain from increasing interest rates by more than 25 basis points next week. The Reserve Bank of India (RBI) will raise the repurchase auction rate to 6.5% from 6.25% on January 25, according to 21 of the 22 economists surveyed by Bloomberg. One economist forecast a 50 basis point increase .

The central bank increased the rate, at which it lends to banks, six times last year. “The consensus seems to be for just a 25 basis point increase and so investors are a little relieved,” said Roy Paul, deputy general man-ager at Federal Bank in Mumbai. The yield on the 7.8% bond due May 2020 fell two basis points this week to 8.16% at close in Mumbai, ac-cording to the central bank’s trading system. The wholesale-price index increased 8.43% last month from a year earlier, according to a commerce ministry statement on January 14. The gauge gained 7.48% in November.

RBI governor Duvvuri Subbarao said in New Delhi on Friday he reviewed the country’s macro-economic situation in a meeting with finance minister Pranab Mukherjee. India is facing a “surge” in inflation, he said on January 17. The finance ministry borrowed Rs 11,000 crore ($2.4 billion) by selling notes due in 2017, 2022 and 2027 on Friday . The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose 13 basis points this week to 7.42%. A basis point is 0.01 percentage point.
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