India’s 10-year bonds rose on speculation purchases of sovereign debt by the central bank on Monday will be the first of many as it seeks to boost the supply of cash in the financial system.
The Reserve Bank of India bought 100 billion rupees ($1.5 billion) of government notes in its first open-market purchase since January 2014. Bank of America Merrill Lynch and Nomura Holdings Inc. predict more such operations as a shortage of funds at banks and outflows of foreign money from local debt threaten to drive borrowing costs higher.
“The RBI’s bond-buying plan is supporting sentiment,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “Investors will keenly be watching if there are more such purchases.”
The yield on bonds due May 2025 fell one basis point to 7.75 percent in Mumbai, according to prices from the central bank’s trading system. The rate dropped to as low as 7.73 percent in the intraday trading. Bonds pared gains as the central bank bought most of notes in the shorter maturities, according to DCB Bank Ltd.
The Reserve Bank bought 62.09 billion rupees of 7.83 percent bonds maturing in 2018, while it purchased 24.90 billion rupees of notes due in 2019, according to a central bank statement. It bought 13.01 billion rupees of bonds due in 2024 and didn’t accept any bids for securities maturing in 2030.
Primary dealers had to rescue a sale of government notes on Friday by picking up unsold debt, fueling speculation investors demanded higher yields. The average banking-system liquidity was in a deficit of 812.9 billion rupees in November, compared with a surplus as recently as September, according to calculations by Kotak Mahindra Bank Ltd. That’s in part due to increased demand for funds on account of festivals and weddings.
“Infusion of liquidity through open-market purchases not only helps bring down funding costs, but also improves the supply-demand equation for bonds,” said Vivek Rajpal, an interest-rate strategist at Nomura in Singapore.
The rupee fell 0.1 percent to 66. 7350 a dollar, prices from local banks compiled by Bloomberg show. It fell 2.1 percent last month in Asia’s worst performance as foreign holdings of rupee bonds fell by the most since May.