India’s bonds gained for a fourth day as decline in oil prices from record levels tempered the concern that inflation will accelerate.
The bond values pushed 10-year yields to the lowest in a week as crude oil in New York fell for a third day, taking the decline to 9%, from a record on 1 August. India imports three-quarters of its energy requirements.
“The drop in oil prices comes as a major relief for the bond market,” said Ashish Vaidya, head of interest-rate trading at HDFC Bank Ltd inMumbai.
The yield on the benchmark 7.49% note, due April 2017, fell 3 basis points, or 0.03 percentage point, to close at 7.82% in Mumbai, according to the Reserve Bank of India’s (RBI) trading system. The price, which moves inversely to the yield, rose 0.18, or 18 paise per Rs100 face value, to 97.77.
India’s inflation has averaged 5.1% since 1 April, when the current fiscal year began. The rate measured 4.36% in the week ended 21 July, according to the latest government data. The central bank wants to keep the rate of price gains capped at 5%.
Bonds pared gains on concern that RBI will drain surplus cash from the financial system, leaving investors with less money to buy debt.
“The Reserve Bank is still not comfortable with excess liquidity and may take steps to drain money,” said Vineet Malik, head of interest-rate trading at HSBC Holdings Plc. in Mumbai.
The central bank had asked lenders on 31 July to put more cash aside as reserves. Banks must keep 7% of deposits as reserves from 4 August—up from 6.5% earlier. The move absorbed as much as Rs16,000 crore. RBI will sell Rs4,000 crore of two-year debt on Wednesday. Bonds also gained as rising stock prices eased concern of overseas funds reducing investments.
The benchmark Bombay Stock Exchange’s sensitive index rose 1% on Tuesday, after falling 1.6% the previous day.
“The return of stability to equity markets suggests there may not be fund outflows that may tighten liquidity,” HDFC’s Vaidya said. bloomberg