India Bonds Gain as Yields Near One-Month High Attract Investors

India’s 10-year government bonds advanced for a second day on speculation yields near a one-month high will attract investors.

The rate paid on notes due 2023 jumped 65 basis points in two days to 8.85 percent, the highest since Aug. 28, after Reserve Bank of India Governor Raghuram Rajan unexpectedly raised the benchmark repurchase rate to 7.5 percent from 7.25 percent on Sept. 20. Bonds also gained after the government reiterated this week a plan to cut the budget deficit.

“We’ve seen a lot of action since the policy surprise and things seem to be settling down a bit now,” Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai, said by phone. “The government is expected to stick to its borrowing plan this year and that, along with attractive yields, has helped bonds advance.”

The yield on the 7.16 percent sovereign notes due May 2023 declined five basis points, or 0.05 percentage point, to 8.79 percent in Mumbai, according to prices from the central bank’s trading system.

India will borrow 2.35 trillion rupees ($37.5 billion) in the six months through March, Economic Affairs Secretary Arvind Mayaram said in New Delhi on Sept. 23. The plan shows the government will broadly adhere to its full-year debt-sales target, Kotak Mahindra Bank Ltd. economists led by Indranil Pan wrote in a report yesterday, referring to the 6.3 trillion rupees of issuance scheduled for the year.

The government plans to reduce the budget deficit to 4.8 percent of gross domestic product this fiscal year, from 4.9 percent in the previous 12 months, Mayaram said.

“We want to fight against inflation and we’ll bring inflation down,” Rajan said Sept. 20 in his first policy review since taking over as the RBI’s governor on Sept. 4. India’s wholesale prices rose 6.1 percent in August, the most in six months. The repo-rate increase was the first since 2011.

One-year interest-rate swaps, a derivative contract used to guard against fluctuations in funding costs, fell four basis points today to 8.82 percent, data compiled by Bloomberg show.