India’s 2022 Bonds Advance on Rupee Rebound, Foreign Inflows

Indian bonds due 2022 advanced for a second day as the rupee’s advance from a record low tempered concern inflation will quicken.

The currency rose 0.8 percent in a second day of gains today as Indian regulators took steps to curb speculative trade. It touched an all-time low of 61.2125 on July 8. Global funds were net buyers of rupee debt for the first time in 14 days on July 8, exchange data show. They have cut holdings of local bonds by $8.1 billion since May 22, when the U.S. Federal Reserve first signaled it may pare stimulus that has driven flows to emerging-market assets.

“A steady currency would definitely provide comfort to bond markets, but it’s too early to say the rupee has stabilized,” said Lakshmi Iyer, head of fixed income at Kotak Mahindra Asset Management Co. in Mumbai. “Data showing foreign funds were net buyers of debt is also positive.”

The yield on the 8.15 percent notes due June 2022 fell two basis points, or 0.02 percentage point, to 7.66 percent in Mumbai, according to the central bank’s trading system. The rate climbed 18 basis points last month, the most since the securities were issued in June 2012.

A sustained 10 percent drop in the rupee adds 150 basis points to 200 basis points to wholesale-price inflation, according to a Standard Chartered Plc research note last month. Wholesale prices, which are more frequently used for policy decisions, rose 4.7 percent in May from a year earlier, the least since 2009, official data show. Reserve Bank of India Governor Duvvuri Subbarao left the repurchase rate unchanged at 7.25 percent on June 17, citing inflation risks.

U.S. Stimulus

The rupee weakened 4.9 percent last month, the most since May 2012. Global funds’ holdings of Indian bonds were at an all-time high on May 21, a day before Fed Chairman Ben S. Bernanke indicated the central bank’s asset-buying program could be tapered if the U.S. job market continues to improve.

The RBI barred banks from proprietary trading in currency futures and exchange-traded options, while the Securities and Exchange Board of India said it will raise margin requirements and curtail open positions.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell six basis points to 7.49 percent, data compiled by Bloomberg show.

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