India Bond Yields Hold Near 1-Week Low on Improving Cash Supply

India’s 10-year government bond yields held near the lowest level in more than a week on speculation increasing cash supply in the banking system will drive demand for sovereign debt.

The nation’s lenders parked a net 225.6 billion rupees ($3.7 billion) via daily liquidity auctions at the Reserve Bank of India on Sept. 1, the most since October 2011, data compiled by Bloomberg show. They added another 201.85 billion rupees yesterday, signaling increased availability of funds. The growing cash supply is probably because of government spending at the beginning of the month, Harish Agarwal, a fixed-income trader at FirstRand Ltd. in Mumbai, said yesterday.

“Liquidity is abundant and that’s helping the bond markets,” Sagar Shah, deputy vice-president for treasury at RBL Bank in Mumbai, said in a phone interview. “Continuous buying by foreign funds is also boosting confidence.”

The yield on the 8.4 percent notes due July 2024 was little changed at 8.52 percent in Mumbai today, prices from the RBI’s trading system show. The rate fell to its lowest since Aug. 22 yesterday.

Overseas investors bought a net $2.8 billion of rupee corporate and government securities last month, exchange data show. That was the fourth straight month of inflows and boosted foreign holdings of Indian debt to a record $42 billion.

Standard Chartered Plc favors local-currency sovereign notes as India’s new government accelerates economic reforms amid expectations that inflation will ease, Chief Investment Strategist Steve Brice in Singapore said last week. Money managers at Amundi Asset Management and Union Investment Privatfonds also said last week that they consider Indian bonds attractive.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, were little changed at 8.46 percent, data compiled by Bloomberg show.

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