Indian Bonds Gain as Yields at Two-Week High Attract Investors

  • Ten-year sovereign securities halt two days of declines
  • Foreign holdings of rupee notes have fallen this month

India’s 10-year sovereign bonds advanced for the first time in three days as a rise in yields to a two-week high lured buyers.

The yield on the notes due May 2025 fell to 7.70 percent in Mumbai from Monday’s 7.72 percent, which was its highest close since Nov. 9, according to prices from the central bank’s trading system. The yield climbed in the last two days amid concern a proposed increase in the salaries of millions of Indian civil servants risks derailing the government’s budget deficit goal. Local markets will be shut Wednesday for a public holiday.

“Value buying by some investors after the recent losses led to an advance in bonds,” said Soumyajit Niyogi, an interest-rate strategist at SBI DFHI Ltd. in Mumbai. Debt markets will remain volatile given concerns over fiscal consolidation and a potential increase in U.S. interest rates.

Ten-year yields have risen six basis points in November as foreign holdings of rupee-denominated debt dropped by 36.3 billion rupees ($547 million) in the biggest outflow since May, according to data compiled by Bloomberg. A government-appointed panel on Nov. 19 recommended a 23.55 percent overall rise in salaries, a move that Finance Minister Arun Jaitley estimates will cost the exchequer 1.02 trillion rupees in the year starting April 1.

The administration aims to lower the budget gap to 3 percent of gross domestic product in the year to March 2018 from 4.1 percent in the 12 months ended this March. The increase in salaries, along with higher economic stimulus spending, would make it harder to meet fiscal targets, Fitch Ratings said last week.

India’s finance ministry is seeking to set the small savings rates closer to government-bond yields, people familiar with the matter said, asking not to be identified as the plan under discussion isn’t public.

India’s rupee gained 0.2 percent to 66.3250 a dollar, prices from local banks compiled by Bloomberg show. That pared its November drop to 1.6 percent.

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