India’s Bonds Gain on Optimism Debt Purchases to Spur Demand

India’s 10-year bonds gained on optimism central bank debt purchases will ease a cash shortage and spur demand for fixed-income securities.

Yields dropped toward a four-month low touched this week as investors bet slowing economic growth will prompt the Reserve Bank of India to cut interest rates. The monetary authority, which has boosted borrowing costs 13 times since the start of 2010, refrained from increasing the repurchase rate at a policy review last week. The central bank will buy as much as 100 billion rupees ($1.9 billion) of government notes today.

“The open-market bond purchases are supporting bonds,” said Roy Paul, deputy general manager of treasury at Federal Bank Ltd. in Mumbai. “The outlook for bonds is positive in the medium term as the monetary cycle may turn.”

The yield on the 8.79 percent notes due November 2021 fell one basis point, or 0.01 percentage point, to 8.33 percent as of 9:40 a.m. in Mumbai, according to the central bank’s trading system. The rate was 8.28 percent on Dec. 20, the lowest level for a benchmark 10-year note since Aug. 25, according to data compiled by Bloomberg.

Lenders borrowed 1.7 trillion rupees from the central bank overnight on Dec. 19, the most this year, as Indian companies withdrew funds from banks to pay taxes, according to data compiled by Bloomberg. They borrowed 1.6 trillion rupees yesterday.

Factory output fell 5.1 percent in October from a year earlier, the first contraction since June 2009, government data showed last week.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose two basis points to 7.74 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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