Rupee Joins Bonds Rallying Most Since 2013 as India Inflows Jump

  • Currency advances in July after three months of losses
  • Local stocks garner the biggest foreign inflows since March

Indian sovereign bonds completed their best monthly performance in more than three years and the rupee strengthened as foreign investors snapped up local debt at the fastest pace since October.

Overseas holdings of rupee-denominated government and corporate securities rose by 73.5 billion rupees ($1.1 billion) this month, as appetite for assets in emerging markets picked up after the U.K.’s June vote to leave the European Union prompted global central banks to boost monetary stimulus. Improving liquidity in India’s banking system and the prospect of more monetary easing has also spurred local demand for the notes.

The yield on government notes due January 2026 slumped 29 basis points in July, the most for benchmark 10-year security in 38 months, to 7.16 percent in Mumbai, according to prices from the central bank’s trading system. It fell two basis points on Friday, with the close being the lowest for the debt since May 2013.

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Bond gains have come as a pick up in monsoon rains spurred optimism that better crop output will help contain inflation and as speculation mounted that the nation’s new central banker will be more dovish. Investors are also drawn to the prospect of economic reforms in Asia’s third-largest economy, which is growing at the fastest pace among the world’s major nations, and offers Asia’s highest 10-year sovereign yields.

“Bonds should benefit from the favorable liquidity conditions,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, which oversees about $1 trillion in assets. “We remain positive on Indian financial markets, based on improvement in the domestic macro outlook, expected increase in company earnings, continued progress in reforms, and a supportive central bank policy.”

The rupee strengthened 0.8 percent in July, its first monthly gain since March, as foreign investors poured a net $1.7 billion into Indian stocks. The currency rose 0.1 percent on Friday to 66.9950 per dollar. The benchmark S&P BSE Sensex index capped a fifth straight month of gains, the longest run since 2014.

Prime Minister Narendra Modi’s government this week inched closer to implementing the nation’s most ambitious tax reform since the 1990s, after the cabinet met a key opposition demand on proposed legislation that would clear the way for a national sales levy. The goods-and-services tax, or GST, aims to replace more than a dozen levies, creating a single market among India’s 1.3 billion people.

The Bank of Japan expanded its purchases of exchange-traded funds and doubled the size of a U.S. dollar lending program on Friday, even as it refrained from boosting the pace of government-bond purchases that have formed the main part of its monetary stimulus.

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