Indian Bonds Advance for Second Day as RBI Boosts Debt Purchases

  • Central bank to buy up to 100 billion rupees of notes Monday
  • Government repurchased 166.5 billion rupees of debt Thursday

Indian sovereign bonds rose for a second day as the central bank said it will buy more debt through its open-market operations.

The Reserve Bank of India will purchase as much as 100 billion rupees ($1.5 billion) of notes on Feb. 8, it said in a statement released after the markets closed on Thursday. The monetary authority, which began debt purchases in December after a gap of almost two years, has already bought securities worth 200 billion rupees via two auctions as it addresses a cash shortage in the banking system. India’s government on Thursday repurchased bonds worth 166.5 billion rupees.

“The OMO announcement has helped ease yields and the market is looking forward to liquidity on a sustained basis,” said Sagar Shah, vice president for treasury at RBL Bank Ltd. in Mumbai. “The government’s bond repurchase too has helped ease the cash crunch.”

The yield on notes due May 2025 fell one basis point to 7.82 percent, taking its two-day drop to three basis points, prices from the RBI’s trading system show. The yield on the new 10-year note due 2026 was little changed at 7.71 percent. The overnight call-money rate, a gauge of interbank funding availability, has averaged 6.43 percent so far this month, compared with 6.61 percent in January and 6.37 percent in December, data compiled by Bloomberg show.

Stock Outflows

Seasonal factors such as a pickup in credit growth closer to the end of the fiscal year in March tend to put pressure on the interbank liquidity deficit, Morgan Stanley economists including Upasana Chachra in Mumbai wrote in a report last month. The cash squeeze has been worsened by capital outflows, with global funds having sold $1.7 billion more Indian shares than they have bought this year.

“With global uncertainty stalling portfolio flows to emerging markets, the RBI naturally has to provide permanent liquidity through OMO,” Bank of America Merrill Lynch economists Indranil Sen Gupta and Abhishek Gupta wrote in a report Friday. “In our base case, the RBI will likely need to OMO another 200 billion rupees” by March, they wrote.

Even so, sovereign bonds completed a weekly decline, with the yield on the 2025 notes up four basis points from Jan. 29. RBI Governor Raghuram Rajan left interest rates unchanged for a second straight meeting this week as the central bank awaits details of the government’s Feb. 29 budget. The administration sold 140 billion rupees of debt at an auction on Friday.

The rupee weakened 0.1 percent to 67.6525 a dollar, according to prices from local banks compiled by Bloomberg. It was up 0.2 percent for the week after rallying the most since September Thursday on speculation disappointing U.S. data will prompt the Federal Reserve to go slow in raising interest rates, keeping demand for Indian assets intact. The currency retreated in each of the last four weeks.

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