Indian Bonds Rally for Third Week as Foreigners Resume Purchases

  • Holdings of local notes rise 21 billion rupees in two days
  • Rupee completes longest run of weekly gains since January

Indian sovereign bonds capped a third weekly advance as slower inflation boosted odds of an interest-rate cut and the central bank injected liquidity through debt purchases.

The rally that began with the government’s Feb. 29 budget decision to stick to its target of narrowing the fiscal deficit to a nine-year low is luring global funds, with overseas holdings set to increase this week after five straight weeks of outflows. The Reserve Bank of India was “comforted” by the budget, Governor Raghuram Rajan said last weekend while telling reporters to “wait and see” how that feeds into monetary policy. The authority is scheduled to review rates on April 5.

The yield on notes due January 2026 dropped 11 basis points from March 11 to 7.52 percent in Mumbai, according to prices from the RBI’s trading system. It rose one basis point on Friday, paring its three-week decline to 26 basis points. Consumer prices rose 5.18 percent in February from a year earlier, the least in four months, official data showed on Monday.

“Slower inflation has cemented the rate-cut expectations that arose after the government stayed on the path of fiscal consolidation,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. “Also, the RBI’s back-to-back bond purchases have added cash and helped improve demand for notes.”

Rupee Rally

The RBI bought 144.09 billion rupees of bonds on Thursday, taking funds injected via such open-market operations this month to 414.09 billion rupees, as the central bank tackles a cash squeeze in the financial system.

Overseas holdings of rupee-denominated government and corporate debt increased 20.7 billion rupees in the last two days, taking inflows for the week through Thursday to 13.3 billion rupees. They fell by 119.3 billion rupees in the last five weeks.

The rupee jumped 0.8 percent from March 11 and 0.4 percent on Friday to 66.5050 a dollar, according to prices from local banks compiled by Bloomberg. The currency posted a third weekly gain. It has rallied 2.9 percent this month, paring its 2016 decline to 0.5 percent, which is Asia’s worst performance.

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