India's 10-Year Bonds Post Biggest Weekly Advance Since June

  • Rate cut, higher foreign investment limit boost sentiment
  • Easy monetary conditions here to stay: Lakshmi Vilas Bank

India’s 10-year sovereign bonds completed their biggest weekly gain in three months after the central bank cut interest rates by more than estimated and allowed foreigners greater access to local debt.

The yield on the notes due May 2025 slumped 15 basis points this week and rose two basis points Thursday to 7.56 percent in Mumbai, prices from the Reserve Bank of India’s trading system show. That’s the biggest decline in the securities since the week ended June 19. The government sold 150 billion rupees ($2.3 billion) of bonds at an auction as planned on Thursday. Local markets will be shut Friday for a public holiday.

RBI Governor Raghuram Rajan surprised investors by lowering the repurchase rate by 50 basis points to a four-year low of 6.75 percent on Tuesday. The move was predicted by just one of 52 economists surveyed by Bloomberg, with 42 expecting a 25 basis point reduction and nine seeing no change. The central bank said the same day that the $30 billion limit on overseas holdings of government bonds will be denominated in rupees rather than in dollars, and the cap will be raised, spurring bets that capital inflows will increase.

“The larger rate cut was indeed a surprise and the comments accompanying it have inspired some confidence that easy monetary conditions and reasonably good liquidity are here to stay,” said R. K. Gurumurthy, Mumbai-based treasurer at Lakshmi Vilas Bank Ltd. He expects the 10-year yield to “gradually move” toward 7.20 percent.

Rupee Gains

The rupee strengthened 1 percent this week to 65.5125 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It rose 0.1 percent on Thursday. The currency climbed 1.4 percent in September in its biggest monthly advance since January.

Aberdeen Asset Management Plc and PineBridge Investments LLC said they will add to holdings of Indian sovereign bonds, Asia’s best performers this year based on indexes compiled by Bloomberg. Overseas holdings of government and corporate notes rose 5.2 billion rupees this week, data from the National Securities Depository Ltd. show.

The ceiling on foreign holdings will be increased in phases to 5 percent of India’s outstanding sovereign debt by March 2018, helping lure 1.2 trillion rupees of additional investment, the RBI said. Foreigners hold 3.8 percent of the notes, according to government estimates.

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