India’s Bond Yield Near 2010 Low on Tax Cut Before RBI Review

The yield on India’s benchmark 2022 bond dropped to the lowest level since 2010, and the rupee rose to the highest in more than two months after the government reduced a levy on overseas investments in local debt.

The so-called withholding tax, charged on interest income earned by foreigners on rupee-denominated notes, will be reduced to 5 percent from 20 percent, Finance Minister Palaniappan Chidambaram said in parliament on April 30. Global funds boosted their holdings of the bonds to a record $36.22 billion on April 29, exchange data show. Local debt and the currency pared gains ahead of the central bank’s interest-rate review tomorrow. Most economists in a Bloomberg survey predict an interest-rate reduction.

“The withholding tax reduction should make Indian bonds more attractive,” Nagaraj Kulkarni and Priyanka Kishore, Standard Chartered Plc analysts based in Singapore and Mumbai, wrote in a report today. The tax cut also “adds to the bullish rupee sentiment,” they wrote.

The yield on the 8.15 percent securities due June 2022 ended little changed from April 30 at 7.73 percent in Mumbai, according to data compiled by Bloomberg. It touched 7.68 percent earlier, the lowest level for a benchmark 10-year note since July 2010. Indian financial markets were shut yesterday for a local holiday.

The rupee also ended little changed at 53.8150 per dollar, according to data compiled by Bloomberg. It touched 53.6650 earlier, the strongest since Feb. 28, and a “strong” technical support level, according to HDFC Bank Ltd. One-month implied volatility in the rupee, a gauge of expected moves in the exchange rate used to price options, rose 30 basis points from yesterday, or 0.30 percentage point, to 8.80 percent.

Rate Meeting

The Reserve Bank of India today said space for monetary policy to support economic growth remains constrained by elevated consumer-price inflation and a record current-account deficit. The monetary authority will lower its repurchase rate to 7.25 percent from 7.5 percent tomorrow, according to 33 of 40 economists in a Bloomberg survey. Six see no change and one predicts a cut to 7 percent.

The European Central Bank today cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession.

Three-month onshore rupee forwards traded at 54.81 per dollar, compared with 54.74 yesterday, according to data compiled by Bloomberg. Offshore non-deliverable contracts were at 54.41 versus 54.31. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

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