India’s Government Bonds Jump Most in a Year as Rupee Rebounds

Indian bonds rallied the most in a year as the rupee’s rebound from a record low tempered concern a weaker currency will stoke inflation and reduce room for the central bank to cut interest rates.

The yield on notes due 2022 pared the biggest monthly jump since the securities were issued in June 2012. The rupee, which touched an all-time low of 60.765 per dollar on June 26, surged 1.5 percent after Federal Reserve Bank of New York President William C. Dudley said yesterday the U.S. may prolong its stimulus program should the world’s biggest economy fail to meet forecasts. Local bonds also tracked gains in U.S. Treasuries, according to Peerless Funds Management Co.

“The rupee’s rebound is a major positive today,” said Ganti N. Murthy, head of fixed income in Mumbai at Peerless Funds, which manages about 48.75 billion rupees ($822 million).

The yield on the 8.15 percent notes due June 2022 slid 15 basis points, or 0.15 percentage point, to 7.60 percent as of 3:45 p.m. in Mumbai, according to the central bank’s trading system. The rate is still up 15 basis points for the month.

Reserve Bank of India Governor Duvvuri Subbarao kept the repurchase rate steady at 7.25 percent on June 17, citing inflation risks, even after wholesale prices rose the least since 2009 in May. The rupee is headed for its worst quarter in a year on concern India’s balance of payments will worsen should the Fed cut $85 billion of monthly bond purchases that have driven flows to emerging markets.

India’s monetary-policy stance will be determined by the evolution of economic growth, inflation and the balance of payments in the months ahead, the central bank said in its policy statement last week, adding that “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.” The RBI will next review policy on July 30.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, dropped nine basis points to 7.48 percent, data compiled by Bloomberg show.

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