India Bonds, Rupee Rise as Investors Predict Gradual Fed Action

  • Buyers returning to market after months of caution: HDFC Life
  • Central bank injects funds to offset corporate tax payments

India’s sovereign bonds advanced the most in two weeks and the rupee rose as investors, after months of worrying about the impact of a U.S. interest-rate liftoff, began buying assets on the assumption that the Federal Reserve will take small, measured steps.

Stocks gained as well, with a renewed decline in crude prices adding to the optimism on India, which imports about 80 percent of its oil needs, while central bank cash injections into the financial system allayed concern of a shortfall as companies make mandatory advance tax payments. The Fed is widely expected to announce its first increase in borrowing costs since 2006 later on Wednesday.

“Traders have been cautious in the last couple of months and we have seen a selloff in both equities and bonds in the run-up to the Fed policy meeting,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. “Now that the event is at hand, the market has priced in a 25 basis point hike and a dovish path for the future,” he said, adding that buyers are returning to the market.

The yield on Indian government bonds due May 2025 dropped five basis points to 7.74 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system. That’s the biggest decline since Dec. 1.

Asia’s Most-Resilient

The rupee rose for a second day by 0.3 percent to 66.7250 a dollar, according to prices from local banks compiled by Bloomberg. The currency, seen as Asia’s most-resilient to a U.S. rate increase by Australia & New Zealand Banking Group Ltd., weakened 2.1 percent last month in the region’s worst performance.

The chances of a Fed tightening have seen global funds cut holdings of Indian bonds and stocks by $2.6 billion since Oct. 31. Traders say the RBI intervened this month as the currency slid past the 67 level, and the monetary authority said for the first time it will step into the exchange-traded derivatives market if needed. The central bank added a total of 443.8 billion rupees ($6.65 billion) to the financial system through seven-, 13 and 5-day repurchase agreements on Wednesday.

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