India’s 10-Year Bonds Drop as Yield at 3-Month Low Deters Buyers

India’s 10-year government bonds fell on speculation the lowest yields in more than three months cooled demand for the securities.

The yield on the 8.83 percent sovereign bonds maturing November 2023 slumped to 8.52 percent yesterday, the lowest level for benchmark 10-year debt since Oct. 11. It has slid 27 basis points in January on optimism slowing inflation will ease pressure on the Reserve Bank of India to raise interest rates, and after the government didn’t sell any debt last week and the central bank took steps to boost cash supply in the banking system. The “large part of the government bonds’ rally is over,” Standard Chartered Plc said in a report today.

The yield on the 8.83 percent notes rose four basis points, or 0.04 percentage point, to 8.55 percent in Mumbai, according to the central bank’s trading system. The rate slid 11 basis points yesterday, the most since Dec. 18, after the RBI announced it will add 200 billion rupees ($3.2 billion) via a 28-day term repurchase auction today.

“There’s been some profit booking after the recent rally took the yield closer to the 8.50-percent mark,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “There’s no immediate trigger for bonds.”

The central bank will also purchase as much as 100 billion rupees of debt due in 2017, 2019, 2023 and 2027 through open-market operations tomorrow, it said in a statement after the close of trade on Jan. 17. The RBI said it will buy debt to add funds as the government’s cash balance increases.

Finance Minister Palaniappan Chidambaram is seeking to narrow the budget deficit to 4.8 percent of gross domestic product in the fiscal year ending March 31. The April-November shortfall was 94 percent of that goal.

Inflation Eases

Ten-year bonds capped a third week of gains on Jan. 17, the longest such run since May. Gains in wholesale prices slowed to 6.16 percent in December from a year earlier, official data showed last week, compared with a 14-month high of 7.52 percent in November. Consumer prices rose 9.87 percent, the least in three months, a separate report showed.

RBI Governor Raghuram Rajan raised borrowing costs twice since mid-September to counter inflation before leaving the repurchase rate at 7.75 percent at the last meeting on Dec. 18. It next reviews policy on Jan. 28.

“While we still maintain a positive local bond outlook, further gains are conditional on the RBI’s monetary policy stance,” Standard Chartered analysts Nagaraj Kulkarni and Samiran Chakraborty wrote in their report.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell two basis points today to 8.19 percent, data compiled by Bloomberg show.

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