Monsoon Pickup Spurs Optimism as India Yield Drops to 7-Week Low

  • Rain deficit since June 1 narrows to 13 percent below normal
  • Cabinet approves pay rise for government employees: official

Indian bonds rose, driving the 10-year yield to its lowest in almost seven weeks, as a pickup in monsoon rains eased concern that a reduction in crop output will stoke food costs.

Total rainfall has been 13 percent below normal since June 1, according to the weather department. The shortfall was 25 percent mid-June. Investors are drawing comfort from this year’s forecast for the highest rains since 1994 after the nation’s first back-to-back drought in almost three decades hurt crops. The June-September seasonal showers affect both summer and winter sowing. A boost to farm output can help curb consumer food prices, which rose 7.55 percent in May, contributing to the fastest inflation in 21 months.

“The rainfall deficit coming down is very encouraging,” said Bansi Madhavani, an analyst at India Ratings & Research Pvt. in Mumbai. “We will have to wait and watch how the season progresses in the next couple of weeks to assess the impact on production.”

The yield on benchmark notes due January 2026 fell for a fourth day in Mumbai, dropping one basis point to 7.44 percent, its lowest close since May 12, according to prices from the central bank’s trading system. The rupee strengthened 0.4 percent, the most since June 6, to 67.6850 a dollar, prices from local banks compiled by Bloomberg show. That pared its loss this year to 2.3 percent, Asia’s worst performance after the Chinese yuan.

Pay Increase

Prime Minister Narendra Modi’s cabinet approved an increase in salaries for civil servants, a government official told reporters on Wednesday. Finance Minister Arun Jaitley is likely to brief the press on the details at 5:30 p.m. in New Delhi. The higher pay is likely to boost consumption, which may stoke inflation.

Even so, the debate over India’s room to cut interest rates is swinging in favor of the doves after Britain’s vote to exit the European Union. Nomura Holdings Inc., which wasn’t expecting any easing from the Reserve Bank of India, now forecasts a 25-basis point reduction by end-2016. Credit Agricole CIB is reviewing its call for just one cut in the second quarter of 2017.

A good monsoon can act as a trigger for a “more aggressive” easing, said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., which oversees 1.07 trillion rupees ($15.8 billion) of assets.

Money managers in Indian equity markets are assigning greater weight to the prospects of a strong monsoon, saying that an improving economy will be able to withstand the global turmoil resulting from the Brexit vote. The S&P BSE Sensex index rose 0.8 percent.

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