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RBI's rate-cut room widest of Asia in swap market.

Summary: India's swap market is pricing in the most-aggressive interest-rate cuts among major Asian economies as forecasters from ING Vysya Bank to Nomura Holdings predict inflation will slow this year.

India's swap market is pricing in the most-aggressive interest-rate cuts among major Asian economies as forecasters from ING Vysya Bank to Nomura Holdings predict inflation will slow this year.

The fixed rate to receive floating payments for one year fell this week to 7.56 per cent, the lowest level since July 16, according to data compiled by Bloomberg. The swap is 44 basis points less than the Reserve Bank of India's eight per cent benchmark rate. That compares with a spread of minus one basis point in South Korea and plus four in Thailand and 38 in China.

The BSE India Sensitive Index of stocks rallied to a two- year high and the benchmark 10-year bond yield fell to a 27-month low this week after RBI Governor Duvvuri Subbarao said on Decenver 18 his focus is shifting toward aiding economic growth. Rate cuts will spur record local-debt issuance in 2013, according to biggest underwriter Axis Bank. Commerzbank AG sees the rupee rising at least 10 per cent.

"The incentive for RBI rate cuts in 2013 is slower inflation and weak growth," Ashish Agrawal, an emerging-market rates strategist at Credit Suisse Group in Singapore, said in a January 10 interview. "The combination of high yields, duration and currency gains should allow Indian government bonds to outperform other Asian markets."

Gains in wholesale prices will slow to 7.2 per cent by March from an average 7.53 per cent in first 11 months of 2012, according to the median forecast of 11 economists in a Bloomberg survey, after Subbarao kept borrowing costs at the highest level among major Asian economies. Inflation was at 7.37 per cent in December, near a 10-month low of 7.24 per cent in November, a separate survey showed before data due today (Monday).

Price gains have remained above the RBI's comfort level of five per cent for the past three years and are the highest among the world's largest emerging markets.

"Inflation has been persistently high in the last two-to- three years because food inflation has remained close to 10 per cent," Upasna Bhardwaj, an economist in Mumbai at ING Vysya Bank, a unit of the biggest Dutch financial-services company, said in a January 9 interview. "By March-end inflation should be at seven per cent. We expect the inflation trajectory to be benign."

The central bank maintained its benchmark repurchase rate at eight per cent for the fifth straight meeting on December 18, after surprising the market with a 50 basis point cut on April 17. The one-year swap rate declined by 20 basis points in that period as official data showed growth in the September quarter matched the slowest since March 2009.

Economists see Subbarao changing course this year, with the benchmark rate falling to 7.5 per cent by March 31 and to 7.25 per cent by September 30, according to median forecasts in a Bloomberg News survey published on December 27. Credit Suisse forecasts as much as 125 basis points in reductions in 2013, including a 50 basis point cut at the next meeting on January 29. While India has room to lower borrowing costs as inflation eases, reductions "won't be very aggressive," Ashima Goyal, member of an RBI technical-advisory committee, said in a Jannuary 9 interview in Mumbai.

The RBI's easing will follow the government's most-aggressive policy changes in a decade to improve public finances and spur growth. Since mid-September, Prime Minister Manmohan Singh has reduced taxes on companies' overseas debt, cut energy subsidies and allowed more foreign holdings in local-currency bonds and in industries including retailing.

Singh said on December 27 he is seeking an "ambitious target" of eight per cent average annual economic expansion in the five years to March 2017. Growth averaged 7.9 per cent in the five years ended March 2012.

Asia's third-largest economy will expand about 5.7 per cent to 5.9 per cent in the financial year through March, less than an earlier estimate of as much as 7.85 per cent, the finance ministry said in a mid-year review presented to Parliament on December 17. That would be the smallest gain since the year ended March 2003, when gross domestic product grew four per cent.

"The RBI can't afford to ignore growth for very long and will have to shift its gear towards supporting economic activity," Vivek Rajpal, a fixed-income strategist at Nomura in Mumbai, said in a January 7 telephone interview. "Investors will do well to invest in long bond positions."

The yield on the 8.15 per cent note due June 2022 dropped seven basis points this week to 7.86 per cent as of 10.40am in Mumbai. The rupee rose for a fourth day to 54.498 per dollar, capping a one per cent weekly rally.

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Publication:Khaleej Times (Dubai, United Arab Emirates)
Geographic Code:9INDI
Date:Jan 13, 2013
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