Indian Bonds Advance as Monsoon Pickup Adds to Budget Optimism

Indian bonds due 2023 rose, pushing the yield to the lowest in two weeks, on indications the monsoon is strengthening and optimism the government will unveil steps in next week’s budget to curb the fiscal deficit.

Seasonal showers covered northern Indian states including Uttarakhand and Himachal Pradesh, the weather bureau said yesterday, adding that conditions are favorable for an advance into other areas. State-run refiners raised fuel prices this week following an increase in rail fares last month, spurring expectations the government will seek to improve its finances by boosting revenue and reducing energy subsidies.

The yield on the 8.83 percent notes due November 2023 fell eight basis points, or 0.08 percentage point, to 8.66 percent in Mumbai, according to the central bank’s trading system. The rate climbed 10 basis points last month, the most since November, as rains fell short of the long-term average.

“Any sign of a revival in rains will buoy the bond market as it would calm inflation expectations,” Debendra Kumar Dash, a fixed-income trader at DCB Bank Ltd. in Mumbai, said by phone. “The government has been making all the right noises, leading to hopes that the budget will focus on fiscal consolidation.”

India’s new administration led by Prime Minister Narendra Modi will present its first federal budget on July 10, the finance ministry said in a statement today. India can’t afford populist policies and needs fiscal discipline for sustainable economic growth, Finance Minister Arun Jaitley said yesterday.

Bond Risk

Bond risk in India has climbed from a one-year low reached last month amid concern a deficient monsoon combined with higher oil prices will reignite inflation and cut scope for the central bank to ease monetary policy. Brent crude rose 2.7 percent in June on concern escalating violence in Iraq will disrupt supplies.

Wholesale-price inflation in India, which imports about 80 percent of its oil, quickened to 6.01 percent in May from a year earlier, the fastest since December. Consumer prices increased 8.28 percent. Reserve Bank of India Governor Raghuram Rajan has raised the benchmark repurchase rate by 75 basis points to 8 percent since taking charge in September.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell two basis point to 8.33 percent, data compiled by Bloomberg show.

Before it's here, it's on the Bloomberg Terminal.