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India 10-Year Bond Yield Drops for Second Day as Rupee Rallies

India’s 10-year bond yield fell for a second day as the rupee’s best run since October led to speculation the central bank may reverse liquidity-tightening measures meant to support the currency.

The rupee capped a fifth day of gains today, the longest streak since October. It gained 6.9 percent in the period, the biggest rally since 1973 when Bloomberg started compiling data for the currency. Raghuram Rajan, who took charge as governor of the Reserve Bank of India on Sept. 4, announced steps to boost the supply of dollars.

The yield on the 7.16 percent notes due May 2023 slid one basis point, or 0.01 percentage point, to 8.46 percent in Mumbai, according to the central bank’s trading system. It fell 16 basis points yesterday as lower-than-forecast U.S. jobs data prompted speculation the Federal Reserve may be less aggressive in paring stimulus that drove demand for emerging-market assets.

“There’s been a dilution of the negative sentiment that had been prevailing in the market,” said J. Moses Harding, executive director at Lakshmi Vilas Bank Ltd. in Mumbai. “Growth is the ultimate aim and the RBI’s monetary policy would go back to restoring that once the currency stabilizes.”

The RBI raised two interest rates and tightened cash supply mid-July in an attempt to stem the rupee’s slide, aiding a three-month surge in government bond yields.

The rupee sank to a record 68.845 per dollar on Aug. 28, raising inflation concerns as India imports about 80 percent of its oil needs. Ten-year government bonds slumped in each of the past three months, the longest losing streak since August 2010, according to data compiled by Bloomberg. The RBI’s next scheduled policy review is on Sept. 20.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, rose three basis points to 9.15 percent today, data compiled by Bloomberg show.

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