India Bonds Rebound as Yield Levels Attract Buyers; Rupee Drops

India’s 10-year bonds rebounded after their worst weekly loss in seven on speculation higher yields attracted investors. The rupee dropped.

The rate on the 8.83 percent sovereign notes due November 2023 rose 16 basis points last week to 8.96 percent, the highest level for benchmark 10-year debt since Nov. 22. That probably drew buyers, according to Bank of Nova Scotia. The Reserve Bank of India left the repurchase rate at 7.75 percent on Dec. 18 and said it “will act, including on off-policy dates if warranted, so that inflation expectations stabilize.” The move was predicted by only five of 31 economists surveyed by Bloomberg, with the rest estimating an increase to 8 percent.

The yield on the 2023 bonds slid 10 basis points, or 0.10 percentage point, to 8.86 percent in Mumbai today, the most since Dec. 18, according to the central bank’s trading system. Last week’s jump was the biggest since the period ended Nov. 8, data compiled by Bloomberg show.

“What we are seeing now is a relief rally,” said M. Natarajan, Mumbai-based head of treasury at Bank of Nova Scotia. “Gains are likely to be limited given the uncertainty around the timing of a rate action by the central bank. Everything will depend on how the inflation numbers pan out.”

The rupee, which rose 0.3 percent last week, fell 0.1 percent today to 61.9150 per dollar, according to prices from local banks compiled by Bloomberg. One-month implied volatility, a gauge of expected moves in the exchange rate used to price options, increased one basis point to 10.47 percent, down from this year’s high of 22.78 percent in August.

The currency has dropped 11.2 percent in 2013, a third year of declines and the third-worst performance in Asia after the Indonesian rupiah and yen, data compiled by Bloomberg show. Government bonds have returned 1.09 percent, after rising 10.9 percent in 2012, according to an index compiled by HSBC Holdings Plc.

Data Clarity

International investors raised holdings of rupee debt by $935 million this month to about $25 billion, exchange data show, after reducing them in each of the last six months.

The RBI held rates even after official data showed wholesale prices jumped 7.52 percent in November from a year earlier, the fastest in 14 months, and consumer-price inflation climbed 11.24 percent, the most in data compiled by Bloomberg going back to January 2012.

Clarity is needed on data before taking further rate action, and nobody should doubt the RBI’s desire to fight price increases, Governor Raghuram Rajan said in an interview broadcast on the ET Now television channel on Dec. 23. He boosted the repo rate by 25 basis points in each of the two previous reviews since taking office Sept. 4.

Three-month offshore non-deliverable forwards declined 0.1 percent to 63.29 per dollar, data compiled by Bloomberg show. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.

India’s one-year interest-rate swap, a derivative contract used to guard against swings in funding costs, rose one basis point to 8.51 percent, data compiled by Bloomberg show.

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