India 10-Year Bond Yield Falls to Lowest Since July; Rupee Drops

India’s 10-year bonds rose, sending the yield to the lowest level since July, on optimism debt purchases by the central bank will boost demand. The rupee fell.

The Reserve Bank of India will offer to buy as much as 80 billion rupees ($1.5 billion) of notes due in 2017, 2022 and 2027 at an open-market auction on Dec. 28, according to a Dec. 24 statement on its website. The RBI resumed such purchases this month to release funds into the financial system and help ease a cash squeeze. Local lenders borrowed an average 1.6 trillion rupees a day from the central bank last week to meet shortages, compared with 909 billion rupees in the previous five days, official figures show.

“The continuation of open-market purchases is supporting bonds,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. (DEVB) in Mumbai. “Debt buying by the RBI is helping keep the liquidity crunch under check.”

The yield on the 8.15 percent notes due June 2022 fell one basis point, or 0.01 percentage point, to 8.12 percent as of 10:20 a.m. in Mumbai, according to the central bank’s trading system. That’s the lowest level since July 27. The yield has dropped 45 basis points this year.

Indian sovereign bonds returned 10.3 percent in 2012, the best performance after Indonesian notes among Asia’s 10 biggest local-currency debt markets tracked by by HSBC Holdings Plc.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.64 percent, data compiled by Bloomberg show.

Rupee Declines

The rupee weakened as concern stalled U.S. budget talks will hamper efforts to revive the global economy reduced demand for emerging-market assets. Congress will return tomorrow to resume negotiations aimed at averting more than $600 billion in automatic tax increases and spending cuts, due early next year, that would hurt the world’s largest economy.

The rupee fell 0.1 percent to 55.015 per dollar in Mumbai, according to data compiled by Bloomberg. It lost 3.5 percent this year, the worst performance after Indonesia’s rupiah among the 10 most-used Asian currencies excluding the yen.

One-month implied volatility, a gauge of expected moves in exchange rates used to price options, was unchanged at 10.10 percent. The rate has decreased 190 basis points in 2012.

Three-month onshore rupee forwards traded at 55.97 per dollar, compared with 55.90 on Dec. 24, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 55.88 versus 55.79. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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

To contact the editor responsible for this story: Anil Varma at avarma3@bloomberg.net

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