Bonds rise amid speculation on RBI scaling back debt sales

Bonds rise amid speculation on RBIscaling back debt sales

New Delhi/Mumbai: Indian bonds rose on Thursday, ending four days of losses, on speculation the central bank will scale back debt sales aimed at draining spare cash following a regulatory move to curb fund flows into the financial system.

Ten-year notes gained the most in more than a week after the stock market regulator on 16 October proposed limiting stock purchases by global funds to slow inflows. The Securities and Exchange Board of India (Sebi) said it plans to put curbs on global investors buying offshore derivatives linked to local shares.

“Any measure to curb capital inflows would reduce the necessity for the central bank to drain cash by selling debt," said Mahendra Jajoo, who manages the equivalent of $2 billion (Rs7,900 crore) in Indian debt at ABN Amro Asset Management in Mumbai. “The bond market is beginning to factor in the prospect of lesser supply of debt from the central bank."

The yield on the 7.99% note due July 2017 fell 2 basis points, or 0.02 percentage point, to 7.91%, according to the central bank’s trading system. The price, which moves inversely to yields, rose Re0.13 to Rs100.55. The 10-year yield may decline as low as 7.85% in the coming weeks, Jajoo said.

Investors buying shares anonymously, using derivatives known as participatory notes, will have 18 months to switch to investing directly in the market, the government said on Wednesday, citing a Sebi proposal.

More than half of the net purchases of Indian stocks this year may have been through the use of participatory notes, according to JPMorgan Chase & Co.

The rules will be introduced on 25 October, finance minister P. Chidambaram said on Wednesday. He said the proposed curbs on stock bets are aimed at slowing capital flows that boosted cash in the financial system and stoked inflation. “It is in the interest of everyone that these flows are moderated," he said. Bond gains were limited by concern rising crude oil prices will fuel inflation, eroding value of fixed payments from debt.

“The biggest risk to all debt investors comes from the price of crude oil,’’ said K. Ramkumar, who manages the equivalent of $1.2 billion in Indian debt at Sundaram BNP Paribas Asset Management Co. in Mumbai. “A spike may result in higher fuel prices, and may push up inflation."

Crude oil in New York climbed to a record $89 per barrel on Wednesday on concern global supplies of crude may be insufficient to meet demand in the northern hemisphere’s winter. The commodity has gained 39.3% in the past six months, according to Bloomberg data. India meets three-quarters of its energy requirements through imports.

A report, to be released by the ministry of commerce and industry on Friday, will show inflation rose to 3.36% in the week ended 6 October from 3.26% in the previous seven-day period, showed a median estimate of 15 economists surveyed by Bloomberg.