India’s 10-year government bonds completed their best week since 2008 as a central bank plan to purchase long-dated debt buoyed demand.
The Reserve Bank of India bought 62.32 billion rupees worth of bonds at an open-market auction today, compared with a targeted 80 billion rupees ($1.25 billion), according to a statement minutes before trading closed. It had announced the purchase plan on Aug. 20 after a cash squeeze created to support the rupee pushed 10-year yields to a 12-year high, threatening the economy.
The yield on the 7.16 percent bonds due May 2023 slumped 63 basis points, or 0.63 percentage point, this week to 8.27 percent, according to prices from the central bank’s trading system. That’s the biggest weekly drop in benchmark 10-year rates since December 2008, data compiled by Bloomberg show. The yield rose four basis points in Mumbai today.
“The RBI’s announcement, especially the dovish tone that accompanied it, has cheered the bond markets,” Srinivasa Raghavan, Mumbai-based executive vice-president of treasury at Dhanlaxmi Bank Ltd., said by phone. “The rupee situation, however, remains precarious.”
The rupee completed a second week of losses today after falling to a record 65.56 per dollar yesterday. Primary dealers bought 17.29 billion rupees of the 150 billion rupees of government bonds auctioned today, the RBI said in a statement.
The yield on Indian debt due May 2023 has climbed seven basis points this month after July’s 75-basis point surge, which was the biggest since March 2009. The rate touched 9.48 percent on Aug. 20, the highest since 2001, data compiled by Bloomberg show. Bonds had slumped after the central bank raised two interest rates and tightened cash in the banking system in an effort to stem the currency’s slide.
A review of the measures since mid-July suggests the “immediate objective of raising the short-term interest rates has substantially been achieved,” the RBI said Aug. 20. It also allowed lenders to move a larger portion of their government bond holdings to the so-called held-to-maturity category so they won’t have to show losses when prices of the securities fall.
RBI’s “move marks the start of a gradual reversal of the liquidity tightening since mid-July,” Barclays Plc analysts led by Siddhartha Sanyal in Mumbai wrote in a report this week. “We think the tightening measures triggered in multiple stages since July 15 were unduly harsh on market liquidity and the interest rate spectrum, without generating any commensurate support for the rupee.”
The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, slumped 51 basis points this week to 9.47 percent, according to data compiled by Bloomberg.