Indian Banks in Record Bond-Buying Spree as Selloff Lifts Yields

India Economy
Photographer: Rajesh Kumar Singh/AP Photo
  • State-run banks bought net 133.9 billion rupees of debt Monday
  • Ten-year note yield jumped the most in almost seven months

Indian state-run banks bought a record amount of sovereign bonds Monday after a selloff following the naming of Urjit Patel as the next central bank governor pushed yields the most in almost seven months.

National lenders, the biggest holders of the debt, bought a net 133.9 billion rupees ($2 billion) of securities, the most in Clearing Corp. of India data compiled by Bloomberg since 2006. Foreign and private sector banks were net sellers of the notes after the government over weekend said Patel will succeed Raghuram Rajan at the helm of the Reserve Bank of India next month.

“With credit growth still slow, state-run banks are deploying funds to buy bonds,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “During a rally they sell and book treasury profits to support their earnings, which have been weighed down by higher provisioning for bad loans.”

The yield on notes due January 2026 was little changed at 7.16 percent in Mumbai, prices from the central bank’s trading system show. It surged six basis points on Monday, the most since Feb. 2. Edelweiss termed the sell-off as a “knee-jerk” reaction to Patel’s appointment, and said it expects yields to decline over the course of the year.

The rally in Indian bonds that began in July continued till early this month, with yield on the 10-year note falling to the lowest since September 2009, as a revival in monsoon rains, improving domestic liquidity and speculation the new RBI chief will be more aggressive in lowering interest rates spurred demand. Patel’s appointment disappointed some investors because his role in pushing through the adoption of India’s inflation target aligns him with Rajan, who has resisted pressure to lower borrowing costs further.

The rupee rose 0.2 percent to 67.0575 per dollar on Tuesday, according to prices from local banks compiled by Bloomberg. The currency has fallen 1.4 percent this year, the worst performance in Asia after China’s yuan.

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