India Bond Yield Rises to Highest Since August as RBI Holds Rate

  • Absence of liquidity measures hurt sentiment: FirstRand
  • One-year interest-rate swaps advance most since April

Indian bonds fell, driving the 10-year yield to its highest since August, as the lack of specific measures to boost financial-system liquidity at the central bank’s monetary policy review left investors disappointed.

The yield on sovereign notes due May 2025 climbed six basis points to close at 7.85 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system. It had dropped to 7.78 percent before the authority’s decision to leave the benchmark repurchase rate at 6.75 percent, a move estimated by most economists in a Bloomberg survey. A key gauge of local equities declined the most in two weeks and the rupee weakened.

Short-term borrowing costs in India have risen as a selloff in emerging markets drives outflows from local stocks. The RBI’s suspected intervention in the currency market to support the rupee, which last month retreated the most since August, has impacted the availability of funds, according to DBS Bank Ltd. The shortage of cash has prompted the central bank to conduct open-market purchases of debt. In Tuesday’s statement, the RBI stopped short of saying that it will continue with daily variable-rate repurchase and reverse-repurchase agreements to smooth liquidity.

“The lack of liquidity measures has impacted market sentiment,” said Harish Agarwal, a Mumbai-based fixed-income trader at FirstRand Ltd. “There’s a sense of uncertainty about future rate cuts as the RBI links them to the government’s success in keeping the fiscal deficit under control.”

Swap traders pared expectations for further monetary policy easing. The cost to lock in interest rates for a year jumped eight basis points, the most since April, to 6.97 percent, according to data compiled by Bloomberg.

Stock Outflows

Structural reforms in the government’s Feb. 29 budget “that boost growth while controlling spending will create more space for monetary policy to support growth,” according to the central bank’s statement. Tuesday’s rate decision was predicted by 42 of 44 economists in a Bloomberg survey.

Overseas funds have withdrawn a net $1.7 billion from Indian stocks this year, data compiled by Bloomberg show. The overnight call-money rate, a gauge of interbank funding availability, averaged 6.61 percent in January, up from 6.37 percent in December, data compiled by Bloomberg show.

The rupee dropped 0.2 percent to 67.98 a dollar, according to prices from local banks compiled by Bloomberg. The currency slid 2.4 percent in January.

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