India 10-Year Bonds Rally Most Since 2009 as RBI Eases Curbs

India’s government bonds rallied, pushing the 10-year yield down by the most in four years, after the central bank said it would buy long-dated sovereign notes in a move that eases curbs on the supply of cash.

The Reserve Bank of India will conduct open-market debt purchases of 80 billion rupees ($1.2 billion) on Aug. 23 and “thereafter calibrate them both in terms of quantum and frequency” based on market conditions, it said yesterday. The liquidity-tightening steps mustn’t “harden longer-term yields sharply” and hurt lending, the RBI said after the rupee fell beyond 64 per dollar for the first time.

The yield on the 7.16 percent government bonds due May 2023 slid 51 basis points, or 0.51 percentage point, to 8.42 percent in Mumbai, according to prices from the central bank’s trading system. That’s the biggest one-day drop for a benchmark 10-year note since March 2009, data compiled by Bloomberg show. The rate touched 9.48 percent yesterday, the highest since 2001.

RBI’s “move marks the start of a gradual reversal of the liquidity tightening since mid-July,” Barclays Plc analysts led by Siddhartha Sanyal in Mumbai wrote in a report. “We think the tightening measures triggered in multiple stages since July 15 were unduly harsh on market liquidity and the interest rate spectrum, without generating any commensurate support for the rupee.”

The currency touched a record 64.55 per dollar today on concern foreign outflows will accelerate as the Federal Reserve prepares to trim its monetary stimulus that has boosted demand for emerging-market assets. Overseas funds have pulled about $12 billion from Indian debt and equities since May 22 when Fed Chairman Ben S. Bernanke first signaled the central bank may pare its $85 billion monthly bond purchases.

July Surge

The Federal Open Market Committee publishes minutes of its July meeting today, with 65 percent of economists surveyed by Bloomberg News predicting the Fed will taper stimulus in September.

The yield on Indian bonds maturing in May 2023 jumped 75 basis points in July, the biggest monthly surge for benchmark 10-year rates since March 2009, as the RBI raised two interest rates and drained liquidity from the banking system in an effort to stem the currency’s depreciation.

A review of the measures taken since mid-July suggests the “immediate objective of raising the short-term interest rates has substantially been achieved,” the RBI said. The issue of cash-management bills will be calibrated going forward, “including scaling it down as may be necessary,” it added.

India will seek to boost inflows through steps including allowing state-owned financial companies to issue “quasi-sovereign” bonds to fund long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, slid 30 basis points to 9.65 percent, according to data compiled by Bloomberg.

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