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Business News/ Money / Calculators/  Amid Trump rout, Black money purge spurs bond gain in India
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Amid Trump rout, Black money purge spurs bond gain in India

Banks will use that money to buy bonds, according to UBS Asset Management and PNB Gilts Ltd, with the latter saying the move also opens room for more interest-rate cuts by curbing inflation.

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India’s move to stamp out black money helped rupee sovereign bonds make a lone escape from the global rout triggered by Donald Trump’s surprise US election victory.

Prime Minister Narendra Modi’s shock withdrawal of 86% of the nation’s currency notes in circulation has seen banks lure Rs3.25 trillion ($48 billion) in deposits as people across Asia’s third-largest economy rushed to submit the old bills. Banks will use that money to buy bonds, according to UBS Asset Management and PNB Gilts Ltd, with the latter saying the move also opens room for more interest-rate cuts by curbing inflation.

“Demonetisation has had the effect of supporting the bond market due to bank buying," said Ashley Perrott, Singapore-based head of pan-Asia fixed income at UBS Asset. “Indian bond yields are, however, relatively uncorrelated with moves in US Treasury yields even normally, so this policy move has obviously served to make this period of disconnect even stronger. We still view India as one of the less vulnerable markets within the region."

The yield on India’s 10-year debt has plunged 38 basis points since 8 November, the only decline among similar-maturity bonds in 53 countries tracked by Bloomberg. Global yields have climbed on speculation Trump’s spending plans will boost inflation, economic growth and the size of the US debt, encouraging the Fed to pick up its pace of rate increases. Modi withdrew Rs500 and Rs1,000 notes in a bid to fulfil his election promise of recovering illegal income, locally known as black money. The gush of funds flowing into the financial system is already causing money-market rates to decline.

“Banks are sloshed with cash," said Vijay Sharma, executive vice-president for fixed income in New Delhi at PNB Gilts. “With credit demand in India still muted, this money is likely to chase investment products such as bonds. The government’s step is also disinflationary in nature."

Consumer inflation eased to a 14-month low of 4.2% in October, official data showed after the close of markets on Tuesday. That compares with the 4.15% median estimate in a Bloomberg survey of economists and September’s upwardly-revised 4.39% increase.

ICICI Prudential Asset Management Co., India’s biggest money manager, said last week it is bullish on bonds as the government’s crackdown on unaccounted wealth opens up room for more rate cuts.

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Published: 28 Nov 2016, 04:06 PM IST
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