Indian Bonds Gain on Speculation Cash Increases Spurring Demand

India’s 10-year government bonds rose, with the yield dropping to near the lowest level this month, on speculation improved supply of cash in the financial system is spurring demand for debt.

Three-month interbank borrowing rates have fallen to 9.21 percent this month from 9.77 percent at the end of March, data from the National Stock Exchange of India Ltd. show. The Reserve Bank of India on April 17 injected additional cash into the financial system through a 15-day term repurchase auction.

The yield on the 8.83 percent notes due November 2023 fell one basis point, or 0.01 percentage point, to 8.854 percent in Mumbai, prices from the central bank’s trading system show. It reached 8.850 percent on April 17, the lowest this month, after India sold 200 billion rupees ($3.3 billion) of notes at cut-off rates below investors’ predictions. That was India’s largest weekly auction of sovereign debt, according to DCB Bank Ltd.

“Improving liquidity is supporting demand for bonds and that was evident in today’s state bond auction results as well,” said Debendra Kumar Dash, a fixed-income trader at DCB Bank in Mumbai. “Overall, there do not seem to be any immediate negative triggers for the market.”

Ten-year yields may slump about 50 basis points over the next three months, Benoit Anne, head of emerging-market strategy at Societe Generale SA, said in an e-mail interview today. Eleven Indian states sold 89.2 billion rupees of bonds at an auction, the RBI said in a statement.

Some 62 percent of the government’s debt sales target of 5.97 trillion rupees for the year ending March 2015 may be met in the April-September period, the administration has estimated. Concern that this increased supply will curb demand for existing bonds pushed 10-year yields to 9.1 percent on April 7, the highest since November.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, rose one basis point, or 0.01 percentage point, to 8.60 percent, according to data compiled by Bloomberg.

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