India’s 10-Year Bonds Advance on Central Bank Plan to Buy Debt

India’s 10-year bonds gained, after completing a fourth monthly loss yesterday, on optimism a central bank plan to buy sovereign debt will spur demand.

The Reserve Bank of India will offer to buy 100 billion rupees ($1.6 billion) of securities at an open-market auction on Oct. 7, it said in a statement yesterday. Government notes also rose after a report showed the nation’s current-account deficit widened less than economists forecast. The shortfall was $21.8 billion in the three months ended June 30, compared with the $23 billion median estimate in a Bloomberg survey and a $18.1 billion gap in the previous period. Indian markets are closed tomorrow for a public holiday.

“The RBI’s move brings some comfort and support to the markets,” said Srinivasa Raghavan, Mumbai-based executive vice-president of treasury at Dhanlaxmi Bank Ltd. “The current-account gap has to fall further.”

The yield on the 7.16 percent sovereign bonds due May 2023 dropped four basis points, or 0.04 percentage point, to 8.73 percent in Mumbai, according to prices from the central bank’s trading system. It jumped 17 basis points in September and 133 basis points last quarter.

The central bank announced the debt-purchase plan after saying last week that it will take steps as required to ensure adequate cash supply in the financial system. The RBI is injecting about 1.5 trillion rupees into markets every day via money-market operations and export-credit refinance, it said in a statement on Sept. 25.

Interest Rates

Government bonds maturing in a decade fell in each of the last four months, the longest run since 2009, as the RBI raised interest rates and curbed funding support to banks to support the rupee, which sank to a record 68.845 per dollar on Aug. 28. The securities will extend the slump as the RBI lifts borrowing costs to quell inflation and the prospect of U.S. stimulus tapering fuels fund outflows, a Bloomberg survey shows.

Global investors net sold bonds worth $274 million on Sept. 30, exchange data showed today. They have pulled more than $11 billion from Indian debt since mid-May amid U.S. tapering concerns.

The current account, the broadest gauge of trade tracking goods, services and investment income, was 4.9 percent of gross domestic product in the April-June period, yesterday’s report showed. The RBI estimates the sustainable level is about 2.5 percent of GDP. The monthly trade deficit has almost halved since May as higher gold-import taxes deter inward shipments of a metal used in India for everything from wedding jewelry to hedging against inflation.

India’s budget deficit in the first five months of the fiscal year reached 74.6 percent of the target for 2013-2014, according to official figures released yesterday.

“The fiscal deficit is a very big concern and the government needs to address it,” Dhanlaxmi’s Raghavan said.

One-year interest-rate swaps, derivative contracts used to guard against fluctuations in funding costs, rose two basis points to 8.74 percent, according to data compiled by Bloomberg. The rate slumped 86 basis points last month.