Monsoon pickup spurs optimism as India bond yield near six-week low

Total rainfall has been 13% below normal since 1 June, according to the weather department. The shortfall was 25% mid-June

Photo: Roshan Mohammad/Mint
Photo: Roshan Mohammad/Mint

Mumbai: India’s 10-year bond yield was near a six-week low as a pickup in monsoon rains eased concern that a reduction in crop output will stoke food costs.

Total rainfall has been 13% below normal since 1 June, according to the weather department. The shortfall was 25% mid-June. Investors are drawing comfort from this year’s forecast for the highest rains since 1994 after the nation’s first back-to-back drought in almost three decades hurt crops. The June-September seasonal showers affect both summer and winter sowing. A boost to farm output can help curb consumer food prices, which rose 7.55% in May, contributing to the fastest inflation in 21 months.

“The rainfall deficit coming down is very encouraging,” said Bansi Madhavani, an analyst at India Ratings & Research Pvt. in Mumbai. “We will have to wait and watch how the season progresses in the next couple of weeks to assess the impact on production.”

The yield on the benchmark notes due January 2026 was at 7.45% as of 11:33am in Mumbai, little changed from its close on Tuesday, which was the lowest since 17 May, according to prices from the central bank’s trading system. The rupee strengthened 0.2% to 67.8075 a dollar, prices from local banks compiled by Bloomberg show. That pared its loss this year to 2.4%, still Asia’s worst performance.

Rate cuts

The debate over India’s room to cut interest rates is swinging in favour of the doves after Britain’s vote to exit the European Union. Nomura Holdings Inc., which wasn’t expecting any easing from the Reserve Bank of India, now forecasts a 25-basis point reduction by end-2016. Credit Agricole CIB is reviewing its call for just one cut in the second quarter of 2017.

A good monsoon can act as a trigger for a “more aggressive” easing, said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., which oversees Rs1.07 trillion ($15.8 billion) of assets.

Money managers in Indian equity markets are assigning greater weight to the prospects of a strong monsoon, saying that an improving economy will be able to withstand the global turmoil resulting from the Brexit vote. The S&P BSE Sensex index rose 0.4%. Bloomberg

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