Global investors made their biggest daily purchases of Indian debt in three years, encouraged by reduced rupee volatility and the prospect of lower inflation.
Overseas funds bought a net $860 million of local-currency government and corporate bonds on Jan. 13, the most since Jan. 14, 2011, exchange data show. They pared holdings by $8.03 billion in 2013 before the Federal Reserve began tapering monetary stimulus in January that drove inflows to developing markets. One-month implied volatility in the rupee has dropped to 8.52 percent from as high as 22.78 percent in August.
“The decoupling of the rupee from other vulnerable emerging-market currencies and a decline in volatility has made high-yielding Indian debt attractive on a volatility-adjusted basis,” Rohit Arora, Singapore-based rates strategist at Barclays Plc, said in an interview. “This has transformed into a pickup in foreign inflows to the bond markets.”
India’s 10-year government notes are gaining for a third straight week on optimism slowing inflation will encourage the Reserve Bank of India to keep interest rates on hold. The pace of wholesale-price increases slowed to a five-month low of 6.16 percent in December from 7.52 percent in November, a government report showed today.
The yield on the 8.83 percent bonds maturing in November 2023 dropped eight basis points, or 0.08 percentage point, to 8.63 percent as of 3:54 p.m. in Mumbai, according to the central bank’s trading system. That’s the lowest level for benchmark 10-year debt since Oct. 31.
Gains in consumer prices slowed to a three-month low of 9.87 percent in December, official data showed Jan. 13.
The RBI left the repurchase rate at 7.75 percent on Dec. 18, after Governor Raghuram Rajan raised it twice since taking office in September to counter price pressures. The central bank’s next rate review is on Jan. 28.
The rupee has rallied 12 percent to 61.595 against the greenback since plunging to a record 68.845 on Aug. 28, as Rajan took steps to boost dollar inflows and the government curbed gold imports.
Barclays recommends investors buy five-year Indian sovereign bonds, without hedging foreign-exchange risk.