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 10-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 RBI sells debt under the market stabilization plan to absorb excess cash from the banking system and contain inflation.
“Traders expected the central bank to announce a stabilization bond sale on 18 May, 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.”
The yield on the benchmark 8.07% note due January 2017 fell 5 basis points, or 0.05 percentage points, to 8.10% as of the 5:30pm close in Mumbai, according to the central bank’s trading system. That is the biggest decline in a day since April 24. The price rose 0.3825, or 38 paise per Rs100 face value, to Rs99.81.
The RBI drained Rs6,000 crore ($1.48 billion) by selling debt last week, compared with Rs2,000 crore the week before. The bank last month raised a yearly limit on such debt sales to Rs1.15 lakh crore from Rs80,000 crore.
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 7.95% from 8.88% 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 May 5, a government report showed on May 18. 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 April 27, the longest declining streak in a year, according to central bank data.