By Anil Varma Dec. 16 (Bloomberg) -- India’s 10-year bonds rose, pushing yields below 6 percent for the first time in more than four years, on speculation the central bank will lower borrowing costs as economic growth and inflation slow. Benchmark notes gained for a seventh day, the longest winning streak in more than three months, after government reports last week showed India’s industrial production fell for the first time since 1993 and the inflation rate dropped to a seven-month low. Bonds also gained on speculation the U.S. Federal Reserve will cut its benchmark rate to a record low today, adding pressure on central banks globally to reduce interest rates. “The party may continue for some more time in the bond market because most factors are supporting buyers,” said Srinivasa Raghavan, head of treasury at IDBI Gilts Ltd. in Mumbai, a primary dealer that underwrites government debt sales. “Looking at the industrial output numbers, we surely need to cut rates more. It’s only a question of when.” The yield on the 8.24 percent note due April 2018 fell 18 basis points to 5.99 percent at the 5:30 p.m. close in Mumbai, the lowest since September 2004, according to the central bank’s trading system. The price climbed 1.40 per 100 rupee face amount to 115.95. A basis point is 0.01 percentage point. Yields on debt due 2018 have tumbled from a seven-year high in five months. They reached 9.55 percent, the highest since 2001, in July. Ten-year yields may decline to as low as 5.5 percent, Raghavan said. Second-Best Returns Indian government bonds are the second-best performers this year among the 10 local-currency debt markets in Asia outside of Japan, according to indexes compiled by HSBC Holdings Plc. They returned 17.9 percent, trailing Thailand’s 18.2 percent. Industrial production fell 0.4 percent in October from a year earlier, the government said Dec. 12. Inflation measured 8 percent in the week ended Nov. 29, the least since April, the commerce ministry said in New Delhi on Dec. 11. The Indian economy may slow more than initially estimated and the central bank will revise down its earlier forecast for a 7.5 percent growth at its Jan. 27 policy meeting, according to Governor Duvvuri Subbarao. The economy will face a period of “painful adjustment” as the world sinks into recession, the central bank said Dec. 6. The Reserve Bank of India has slashed benchmark interest rates three times in the current quarter. U.S. interest-rate futures showed a 64 percent chance the Fed will lower its target rate for overnight loans between banks to 0.25 percent today from 1 percent. The odds for a half-point cut were 36 percent. A half-percentage point cut in the U.S. today would widen India’s rate advantage to 6 percent. “The U.S. may well be heading toward zero interest rates,” IDBI’s Raghavan said. “That strengthens the case for more rate cuts worldwide. That’s encouraging for bond buyers.” The cost of five-year interest-rate swaps, or derivative contracts used to guard against rate fluctuations, slipped to the lowest level since April 2004. The rate, a fixed payment made to receive floating rates, dropped to 4.775 percent from 4.86 percent yesterday. To contact the reporter on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.

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