Monsoon Revival Drives Longest India Bond Rally in Three Months

Updated on
  • Rainfall 35 percent above normal in seven days ended July 6
  • State-run banks on Thursday bought most debt since March 2015

Indian bonds completed the longest stretch of weekly gains since April as a revival in monsoon rains improved the outlook for inflation and interest rates in Asia’s third-largest economy.

State-run banks, the largest holders of sovereign debt, bought a net 71.8 billion rupees ($1.1 billion) of securities on Thursday, the biggest single-day purchase since March 2015, Clearing Corp. of India Ltd. data show. Rainfall across India was 35 percent above normal in the seven days till July 6, according to the weather department, spurring optimism better crop output will help contain food costs, which have a significant bearing on overall inflation.

The yield on government notes due January 2026 fell four basis points from July 1 to 7.38 percent in Mumbai, according to prices from the central bank’s trading system. That took its decline to 12 basis points in the past three weeks, the longest run since mid-April. The yield was steady on Friday.

“A pickup in monsoon after a delayed start has improved sentiment,” said Badrish Kulhalli, a fixed-income fund manager at HDFC Standard Life Insurance Co. in Mumbai. “That, along with a benign global environment for bonds, has raised expectations of a further reduction in domestic interest rates.”

Thanks to strong recent showers, rainfall in the monsoon season that began June 1 was 1 percent above normal as of Thursday, compared with a deficit of 25 percent seen mid-June. The four-month spell affects both summer and winter sowing in India and a boost to farm output can thus help curb consumer food prices, which rose 7.55 percent in May, contributing to the fastest inflation in 21 months. The Reserve Bank of India has left benchmark borrowing costs unchanged since cutting them to a five-year low in April.

HDFC Standard Life expects the 10-year yield to drop another 5-10 basis points over the next couple of months, Kulhalli said. Bonds maturing in five and seven years have rallied more than the 10-year securities this week as improving financial-system liquidity helps drive short-term rates lower. India sold 150 billion rupees of sovereign debt at an auction as planned on Friday, as per a central bank statement.

The rupee weakened 0.1 percent this week to 67.37 a dollar, prices from local banks compiled by Bloomberg show. The currency, which was little changed on Friday, has depreciated 1.8 percent this year.