India’s Sovereign Bonds Rise With Rupee on Economic Optimism

India’s 10-year sovereign bonds rose with the rupee on optimism demand for local assets will increase as plunging oil prices improve the nation’s economic outlook.

Asia’s third-largest economy, which relies on imports for 80 percent of its oil needs, has seen last year’s near 50 percent slump in Brent crude help slow inflation and narrow its trade deficit. The Reserve Bank of India cut interest rates for the first time since May 2013 in an unscheduled move on Jan. 15, boosting the appeal of government bonds for ICICI Prudential Asset Management Co., India’s best-performing fixed-income fund manager in 2014.

“The reversal in the interest-rate cycle is adding to economic optimism,” said Harish Agarwal, a fixed-income trader at FirstRand Ltd. in Mumbai. “That’s increasing the attractiveness of Indian assets.”

The yield on the notes maturing July 2024 declined three basis points, or 0.03 percentage point, to close at 7.69 percent in Mumbai, prices from the RBI’s trading system show. That’s the lowest close for a benchmark 10-year rate since July 2013.

Global funds, which bought a record $26 billion of rupee-denominated corporate and sovereign debt in 2014, have added another $2.2 billion to their holdings so far this year, exchange data show.

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RBI Governor Raghuram Rajan cut the benchmark repurchase rate to 7.75 percent from 8 percent, prompting global banks including Morgan Stanley to raise their forecasts for easing this year. His decision came after consumer prices held below the RBI’s 6 percent target for a third month in December.

“We are very positive on bonds and interest rates,” Rahul Goswami, chief investment officer for fixed income at ICICI Prudential, which manages 1.37 trillion rupees ($22 billion), said in a Jan. 19 interview in Mumbai. “While the RBI has started reducing rates, there’s still a reasonable opportunity to accumulate for investors.”

Data last week showed the trade deficit, a part of the broader current account, narrowed to $9.43 billion in December, the smallest since February, as oil imports dropped 28.6 percent from a year earlier.

In the currency market, the rupee gained 0.1 percent to 61.6375 a dollar today, prices from local banks compiled by Bloomberg show. Three-month offshore non-deliverable forwards rose 0.1 percent to 62.50, 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.

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