Indian 10-year sovereign bonds rallied, reversing intraday losses, after officials said the government will cut its borrowing program and may announce a debt buyback.
Debt sales for the half-year ending Sept. 30 will be lowered by about 150 billion rupees ($2.5 billion), officials with knowledge of the matter said today, asking not to be identified as they weren’t authorized to speak to the media. The government already has a healthy cash balance in its account, they said. Later, a finance ministry official, on condition of anonymity, told reporters debt sales will be reduced by 160 billion rupees.
The yield on the 8.4 percent bonds due July 2024 slid seven basis points after the news to close at 8.52 percent in Mumbai, according to the central bank’s trading system. The rate ended at 8.54 percent yesterday.
“The constant supply has been keeping government bonds under pressure,” Dwijendra Srivastava, Mumbai-based head of fixed income at Sundaram Asset Management Co., said by phone. “Demand for existing securities could rise as money should move towards them if the auction sizes are reduced. A buyback will help by boosting liquidity in the market.”
The Reserve Bank of India, which manages the government’s borrowing program, may publish a revised sale calendar as early as today, the officials said, adding the borrowing target for the full year ending March 31 is unchanged so far.
India already cut the size of this week’s debt auction. The nation sold 80 billion rupees of notes maturing between 2024 and 2043 today. An issuance calendar on the RBI’s website had indicated that the government would offer 140 billion rupees of securities.
The sale of T-bills will also be lowered by about 20 billion rupees every week through September, the finance ministry official said.
Ten-year bonds completed their first weekly advance in three today, with the yield dropping 12 basis points since Aug. 8. The gains came on optimism demand will rise due to a reduced debt auction and after the central bank added cash to the financial system. The RBI added 150.07 billion rupees through seven-day term repurchase agreements yesterday after pumping in 96.56 billion rupees via single-day repos over the previous two days.
Bonds rallied even as data this past week showed consumer prices jumped 7.96 percent in July, more than the 7.4 percent rise estimated in a Bloomberg survey of analysts and a revised 7.46 percent in June. Faster inflation increases pressure on RBI Governor Raghuram Rajan to refrain from lowering borrowing costs after he raised the benchmark repurchase rate three times since September to 8 percent.
The rupee extended gains, climbing 0.8 percent to 60.77 per dollar today. It rose 0.6 percent this week. Local debt and currency markets are shut tomorrow and on Aug. 18 for public holidays.
One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, dropped 85 basis points this week to 7.10 percent. Three-month offshore non-deliverable forwards rose 0.7 percent since Aug. 8 to 61.73 per dollar, according to data compiled by Bloomberg. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, declined six basis points this past week to 8.45 percent, data compiled by Bloomberg show.