Indian Bonds Rally as Central Bank to Buy Back More Debt

  • RBI to buy as much as 120 billion rupees of notes on March 3
  • Ten-year securities complete fourth weekly drop before budget

Indian sovereign bonds maturing in 2026 rallied the most since the notes were issued in early January on optimism cash supply will improve as the central bank announced plans to buy back more debt.

The Reserve Bank of India will purchase as much as 120 billion rupees ($1.7 billion) of notes on March 3, according to a statement after the close of markets on Thursday. It has already bought back securities worth 300 billion rupees through open-market operations
over the past three months in a bid to tackle a cash squeeze that’s driven bond yields and short-term rates higher. The government is scheduled to announce its borrowing program in Monday’s budget.

The yield on notes maturing in January 2026 fell eight basis points to 7.78 percent in Mumbai, according to prices from the RBI’s trading system. The bonds completed a fourth straight weekly loss, with the yield having risen four basis points from Feb. 19.

“The RBI’s announcement looks like a hurried move in reaction to the surge in yields,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. “The open-market operation will help compensate the liquidity shortage.”

Auction Failure

Bonds have suffered as concern grows that Prime Minister Narendra Modi’s administration will struggle to meet fiscal targets. This year’s outflows of $2.5 billion from stocks have exacerbated a seasonal cash crunch, with three-month commercial paper rates surging 156 basis points to 9.31 percent.

The government this week failed to sell any of the treasury bills offered at an auction for the first time since July 2013, leading to speculation investors demanded higher yields. Underwriters had to rescue four auctions of sovereign notes in the last two months.

The rupee rose 0.1 percent to 68.6325 a dollar, according to prices from local banks compiled by Bloomberg. It fell to as low as 68.7875 earlier, close to a record low of 68.845 seen in August 2013. It has weakened 3.6 percent this year in Asia’s worst performance after the won.

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