Rupee Rallies With Bonds as Modi Inches Closer to Tax Reform

  • Daily turnover for Indian sovereign debt climbs to a record
  • Fed’s policy statement more dovish than anticipated: Edelweiss

The rupee climbed to a two-week high on optimism Indian lawmakers will be able to implement a national sales tax, with inflows into local assets picking up as global central banks boost stimulus.

Sovereign bonds rose the most since Feb. 29 as Prime Minister Narendra Modi’s cabinet met a key opposition demand on proposed legislation that would clear the way for the goods-and-services tax, or GST, the nation’s most ambitious economic reform since the 1990s. The U.S. Federal Open Market Committee’s statement released Wednesday signaled policy makers were in no rush to raise interest rates, spurring gains in emerging-market currencies.

“Improving prospects of GST getting passed is one of the key reasons boosting domestic sentiment,” said Bhupesh Bameta, head of research for currencies and rates at Edelweiss Financial Services Ltd. in Mumbai. “Fed’s policy statement appeared more dovish than people were anticipating.”

The rupee gained for a third day, rising 0.2 percent to 67.0350 a dollar in Mumbai, according to prices from local banks compiled by Bloomberg. It rose to 66.9975 earlier, the strongest level since July 15. Foreign funds have been net buyers of $1.3 billion of Indian stocks this month, set for the biggest purchases since March. Holdings of rupee-denominated debt have climbed 75.5 billion rupees ($1.1 billion) in July.

Yields Plunge

The yield on government notes due January 2026 dropped six basis points to 7.19 percent, prices from the central bank’s trading system show. That’s the lowest close for a benchmark 10-year security since May 2013. The yield is down 26 basis points for July. The daily turnover for sovereign debt on the Reserve Bank of India’s dealing platform reached a record 1.43 trillion rupees on Thursday, data from The Clearing Corp. of India show.

Bonds have rallied on hopes a revival in monsoon rains this month will aid crop output and help contain food costs, improving the overall inflation outlook. Mounting speculation that a successor to Governor Raghuram Rajan will be more aggressive in cutting interest rates has contributed to the gains. Japan announced plans Wednesday for more than 28 trillion yen ($267 billion) in economic stimulus amid efforts to prop up its economy.

“Bond yields have scope to fall further as India is among the few countries following conventional policies and offering very attractive yields,” Bameta said, adding that India’s “risk profile, based on current account deficit and fiscal deficit, has also improved, which means the foreign inflows will continue.”

The cabinet decided late Wednesday to eliminate an additional 1 percent charge on inter-state sales that was included in a constitutional amendment bill to create the GST. The opposition had argued that the additional levy would undermine the goal of creating a single market among India’s 1.3 billion people. Modi’s party has indicated it will push the measure next week for discussion and possibly a vote before the current parliament session ends Aug. 12.

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