Anoop Agrawal and Anil Varma, Bloomberg
Mumbai: India’s bonds rose on optimism the central bank won’t sell securities this week to drain banks’ spare cash, enabling lenders to invest the funds in debt.
Benchmark ten-year yields, which move inversely to prices, fell the most in almost a month as the Reserve Bank of India refrained from scheduling bond sales for the first time in three weeks. The bank sells debt under the so-called market stabilization plan to absorb excess cash from the banking system and contain inflation.
“Traders expected the central bank to announce on Friday a stabilization bond sale, as it has done in recent weeks,” said Poonam Tandon, a bond trader at Development Credit Bank Ltd in Mumbai. “But no such announcement was made, and this has helped bonds gain. Also, money market rates are lower.”
The yield on the benchmark 8.07% note due January 2017 fell 5 basis points, or 0.05 percentage points, to 8.1% as of 11:33 am in Mumbai, according to the central bank’s trading system. That is the biggest decline in a day since 24 April. The price rose 0.34%, or 34 paise per Rs100 face value, to Rs99.76.
The Reserve Bank drained Rs60 billion by selling debt last week, compared with Rs20 billion the week before. The bank last month raised a yearly limit on such debt sales to Rs1.15 trillion from Rs800 billion.
A decline in the overnight interest rate in the local money market made it less expensive for investors to buy debt with borrowed funds. The rate fell to 8.1% from 8.9% a week ago, according to data compiled by Bloomberg.
Bonds also gained on speculation inflation will slow, allowing the central bank to stop raising borrowing costs. The Reserve Bank has increased benchmark interest rates nine times since 2004 to curb price gains.
“The medium-term outlook for bonds is positive,” said V. Srinivasan, treasurer at JPMorgan Chase & Co. in Mumbai. “Money supply growth is slowing and so is credit growth. The inflation rate is also declining. All the economic indicators are behaving as the central bank would prefer them to, and so the odds of an interest-rate increase before the July policy meeting looks thin.
Weekly gains in wholesale prices slowed for a third week to 5.44% in the week ended 5 May, a government report showed on 18 May. The Reserve Bank has forecast the inflation rate to fall to 5% in the coming months.
Bank credit in India fell in the four weeks to 27 April, the longest declining streak in a year, according to central bank data.