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Business News/ Market / Stock-market-news/  Indian bond yield slumps to 13-month low on deficit optimism, state elections
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Indian bond yield slumps to 13-month low on deficit optimism, state elections

Yield on 8.4% sovereign notes due July 2024 fell 3 bps to 8.36%, the lowest for benchmark bond since September 2013

The rupee advanced 0.1% to 61.36 per dollar, according to prices from local banks compiled by Bloomberg. It touched 61.1750 earlier, the strongest level since 14 October. Photo: Pradeep Gaur/MintPremium
The rupee advanced 0.1% to 61.36 per dollar, according to prices from local banks compiled by Bloomberg. It touched 61.1750 earlier, the strongest level since 14 October. Photo: Pradeep Gaur/Mint

Mumbai: India’s 10-year bond yield slumped to a 13-month low and the rupee advanced after the government boosted efforts to cut energy subsidies and the budget deficit.

Prime Minister Narendra Modi’s administration freed diesel prices of state control for the first time in more than a decade and raised natural gas tariffs over the weekend. His Bharatiya Janata Party (BJP) won the most seats in two state elections, counting of votes showed, fuelling optimism he will find more provincial support for policy changes aimed at reviving the economy.

“The fuel reforms are a very important signal of the government’s commitment to tough economic reforms," Sonal Varma and Aman Mohunta, Mumbai-based economists at Nomura Holdings Inc., wrote in a report received by e-mail on Monday. “We believe that the economy is headed in to a Goldilocks period of higher growth and lower inflation in 2015."

The yield on India’s 8.4% sovereign notes due July 2024 fell three basis points, or 0.03 percentage point, to 8.36%, prices from the central bank’s trading system show. That’s the lowest for benchmark 10-year debt since September last year.

The rupee advanced 0.1% to 61.36 per dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It touched 61.1750 earlier, the strongest level since 14 October.

The fuel policy changes come after global oil prices fell to a four-year low this month, helping reduce costs for India, which buys about 80% of its oil abroad. Keeping diesel affordable to the nation’s poor cost the government and oil producers about 4 trillion in the past 10 years, according to oil ministry data.

Budget deficit

Modi’s government has pledged to cut the budget deficit to a seven-year low of 4.1% of gross domestic product in the year through March 2015. Falling oil prices may even help narrow the gap to about 4%, according to Mizuho Bank Ltd.

The BJP won 122 of 288 seats in India’s western Maharashtra state and 47 of 90 seats in the northern Haryana state, according to official results.

“These victories will help the government gradually increase its foothold in the upper house of Parliament and accelerate the pace of reforms," Radhika Rao, an economist at DBS Bank Ltd in Singapore, wrote in a note on Monday.

One-month implied volatility in the rupee, a gauge of expected moves used to price options, slid 20 basis points today to 7.30%. Three-month offshore non-deliverable rupee forwards were unchanged at 62.25 per dollar. Forwards are agreements to buy or sell assets at a set price and date, and non-deliverable contracts are settled in dollars.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, plunged 16 basis points to 8.07%, the lowest since July 2013, data compiled by Bloomberg show. Bloomberg

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Published: 20 Oct 2014, 05:53 PM IST
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