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. India plans to borrow as much as 500 billion rupees ($9.5 billion) using land and shares as collateral in an effort to narrow a budget deficit, two government officials with direct knowledge of the matter said.
“The open-market 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 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.
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 Reserve Bank resumed open-market bond purchases last month for the first time since January. The monetary authority has bought 243 billion rupees of government debt in auction over the past month, central bank data show. It set a target to buy as much as 100 billion rupees of government notes today.
Finance Minister Pranab Mukherjee said in October that it would be a “challenge” to meet his aim of narrowing the budget gap to a four-year low of 4.6 percent of gross domestic product as slowing growth reduces tax collections. Moody’s Investors Service yesterday said the deficit will widen to 7.6 percent this year.
The government raised the borrowing aim by 13 percent to a record 4.7 trillion rupees on Sept. 29.
“Investors were resigned to the fact that the borrowing would be increased further, especially after the finance minister’s statement about the fiscal deficit,” said Anoop Verma, a trader at Development Credit Bank Ltd. in Mumbai. “The move to pledge assets will definitely help sentiment as there will be reduced pressure to tap the bond market.”
Lenders borrowed 1.7 trillion rupees from the central bank overnight today, matching the level touched on Dec. 19, the most this year, as Indian companies withdrew funds from banks to pay taxes, according to data compiled by Bloomberg.
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 one basis point to 7.75 percent, according to data compiled by Bloomberg.