India’s 2022 Bond Yield Drops to Two-Week Low as Cash Increases

The yield on Indian bonds due 2022 fell to the lowest in more than two weeks on optimism improving supply of cash in the banking system will spur demand for debt.

Local lenders’ daily borrowings from the central bank to meet fund shortages fell to 108.8 billion rupees ($1.8 billion) yesterday, the least since March 31, official data show. The overnight interbank borrowing rate was at 6.35 percent today, compared with 7 percent at the end of last week. The Fixed Income Money Market and Derivatives Association widened a daily trading band for local debt, according to its website, after benchmark yields fell the most this week.

“The liquidity situation has improved and that’s providing a boost for bond prices,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai.

The yield on the 8.15 percent notes due June 2022 slid nine basis points, or 0.09 percentage point, to 7.60 percent in Mumbai, according to the central bank’s trading system. That’s the lowest level since June 19. The yield jumped 18 basis points last month, the most since the securities were issued in June 2012, as the Indian rupee plunged 4.9 percent.

Cash in the banking system increased amid signs the government is stepping up expenditure to boost economic growth. India’s spending in the first two months of the fiscal year ending March 2014 was 13.1 percent of the total budgeted expenditure, compared with 12.8 percent in the same period a year ago, government estimates showed last week.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell 14 basis points to 7.42 percent, data compiled by Bloomberg show.