Seven-Week Rally Ends as Indian Bonds Show Signs of Fatigue

  • Rising oil deters investors from buying more debt: Edelweiss
  • Rupee rises 0.2 percent to cap first weekly gain in three

Indian sovereign bonds completed their first weekly decline since February amid speculation rising oil prices will fuel inflation and cloud the outlook for monetary easing.

This month’s 13 percent advance in Brent crude threatens to increase import costs for Asia’s third-largest economy that gets three quarters of its oil from overseas. That’s ended a seven-week debt rally -- the longest since 2012 -- that was sparked by the government’s budget restraint, slowing consumer-price gains and this year’s first interest-rate cut by the central bank.

The yield on notes due January 2026 rose two basis points from April 15 to 7.46 percent in Mumbai, according to prices from the Reserve Bank of India’s trading system. It fell two basis points on Friday. The yield slumped 34 basis points in the last seven weeks and dropped to 7.41 percent on April 4, the lowest for a 10-year benchmark security since June 2013.

“The bond market has absorbed all the positive news and is now in a wait-and-watch mode,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “Investors will refrain from taking further positions as commodity prices, especially oil, have started inching up.”

Brent has climbed for a third week as declining U.S. crude production provided more evidence that the market is rebalancing. Consumer inflation in India slowed to a six-month low of 4.83 percent in March. The RBI, which lowered benchmark borrowing costs this month for a fifth time since early 2015, wants to limit inflation to 5 percent by March 2017.

Edelweiss expects the 10-year yield to stay in a range of 7.40 percent to 7.60 percent over the next one month as investors await the onset of the June-September monsoon rains. The seasonal showers, forecast to be above-average for the first time in three years, are crucial to keep prices in check as they account for about 80 percent of India’s total rainfall and water more than 50 percent of farmland.

The rupee rose 0.2 percent from April 15 to 66.4850 a dollar, ending a two-week decline, according to prices from local banks compiled by Bloomberg. The currency fell 0.1 percent on Friday and has weakened 0.5 percent this year in Asia’s worst performance.

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