India’s 10-year bonds rallied, pushing yields to the lowest since April 2004, after the central bank slashed interest rates for the fourth time in less than three months. Benchmark bonds extended gains after completing their best year since 2001 as the Reserve Bank of India cut the overnight lending rate by a percentage point to 5.5 percent. India also unveiled a second stimulus package to counter the effect of the global slump. The 10-year yield approached a record low of 4.95 percent it touched in October 2003. “It’s only a matter of time before yields break below 5 percent and drop to a new record,” said K. Ramanathan, who manages the equivalent of $2.2 billion in Indian debt at ING Investment Management in Mumbai. “There’s still scope for further cuts as the economic picture is quite bleak. We probably need more data to know by when.” The yield on the 8.24 percent note due April 2018 fell 22 basis points to 5.07 percent at the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price climbed 1.84 per 100-rupee face amount to 123.25. The central bank also cut the reverse repurchase rate at which it drains excess cash from the financial system by a percentage point to 4 percent to make it less attractive for lenders to park their money with the monetary authority. It reduced the amount of funds banks need to set aside to free up cash and boost lending. Interest-rate swaps indicated traders increased bets for further reductions in borrowing costs. The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, tumbled to the lowest since at least 2001 when Bloomberg data is available. The rate, a fixed payment made to receive floating rates, fell to 4.42 percent from 4.56 percent yesterday. Slowing Inflation Slowing inflation and a slide in commodity prices have allowed the central bank to cut rates. India cut prices of gasoline and diesel last month as crude oil dropped more than 70 percent from a record $147.27 a barrel it touched in July. Inflation cooled to 6.4 percent in the third week of December, halving from a 16-year high of 12.91 percent reached in early August, data provided by the government show. Ten-year yields have dropped 4.48 percentage points from a seven-year high of 9.55 percent reached in July. They fell 2.54 percentage points in 2008, the first annual decline since 2003. Indian government bonds across maturities returned 22 percent last year, the best performance among 10 local-currency debt markets in the region, according to indexes compiled by HSBC Holdings Plc. Raising Limit India’s government today raised the overseas investment limit in local corporate bonds to $15 billion from $6 billion, according to a statement e-mailed from New Delhi. State governments will be permitted to raise up to 300 billion rupees ($6.2 billion) in the year to March 31. The government plans to give 200 billion rupees to boost the capital of state-run banks. Today’s measures follow a 200 billion rupee spending plan for roads and ports and cuts in excise duty unveiled last month. Growth in India, Asia’s third-largest economy, may slow to 7 percent in the year ending March 31 from 9 percent or more in the previous three years, according to the government. That would be the slowest pace in four years.

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