India 10-Year Bond Yield Drops to Two-Week Low on Political Spat

India’s 10-year sovereign bonds gained, pushing the yield to a two-week low, as speculation the government will lose its majority increased the allure of safer investments such as government debt.

Trinamool Congress ministers will be pulled from the federal cabinet on Sept. 21 over policy changes announced last week, Mamata Banerjee, leader of the second-largest party in the governing coalition, said on Sept. 18. The central bank said Sept. 17 it would cut the amount of cash lenders must set aside as reserves to 4.5 percent from 4.75 percent, effective Sept. 22.

“The political uncertainty is supporting debt investment,” said Srinivasa Raghavan, an executive vice president of treasury at Dhanlaxmi Bank Ltd. (DHLBK) in Mumbai. “The prospect of further monetary easing will also support bonds.”

The yield on the 8.15 percent notes due June 2022 fell one basis point to 8.16 percent, the lowest level since Sept. 6, in Mumbai, according to the central bank’s trading system.

Prime Minister Manmohan Singh’s government announced Sept. 14 that it would permit overseas investors to own 51 percent in retail ventures and buy as much as a 49 percent stake in the nation’s airlines, while also increasing diesel prices for the first time since July 2011.

Asia’s third-largest economy expanded 5.5 percent in the three months through June 30, compared with the 5.3 percent growth in the previous quarter that was the least since 2009. Raghavan predicted the monetary authority will cut the repurchase rate by 25 basis points to 7.75 percent at a review on Oct. 30 to support expansion.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, were unchanged at 7.71 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: James Regan at jregan19@bloomberg.net

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