India Bonds Rally Most in Five Weeks as Fed Outlook Boosts Rupee

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Indian sovereign bonds due in 2024 rose the most in five weeks and the rupee climbed on speculation demand for the nation’s assets will be sustained after the Federal Reserve said it will raise interest rates gradually.

Fed Chair Janet Yellen Wednesday signaled a pickup in the U.S. economy is keeping it on track to lift borrowing costs this year, though subsequent increases are likely to be more gradual than anticipated earlier. That reduced chances of sudden outflows from emerging markets. Policy makers also lowered their longer-term projections for U.S. rates.

The yield on the Indian notes due July 2024, the current 10-year benchmark, slid eight basis points, the most since May 11, to 7.95 percent in Mumbai, according to prices from the central bank’s trading system. The rupee strengthened 0.6 percent, the most since Jan. 8, to 63.7325 a dollar, prices from local banks compiled by Bloomberg show.

“The Fed’s statement suggests that the liftoff won’t be as harsh as people expected,” said Ajay Manglunia, head of fixed income at Edelweiss Financial Services Ltd. in Mumbai. “Further clarity on the Fed’s rate action will help restore stability for Indian bonds.”

As investors speculate on the timing of the first U.S. rate increase, the yield on the 2024 securities has jumped 21 basis points this quarter amid concern a rebound in Brent crude prices and potentially deficient monsoon rains will fan inflation. Global funds have been net sellers of $471 million of rupee-denominated debt since the end of March, according to data from the Central Depository Services Ltd. compiled by Bloomberg. They were buyers in each of the last five quarters.

The yield on sovereign bonds due May 2025, the new 10-year security issued last month, dropped eight basis points to 7.76 percent on Thursday. It’s still up 12 basis points in June.

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