Investors ‘Going Long’ India Bonds as Rate-Cut Bets Extend Rally

Updated on
  • Ten-year yields dropped most since May 2013 last month
  • One-year interest-rate swaps fall four basis points on Monday

Indian sovereign bonds extended gains after the best monthly performance in more than three years as easing inflation concern spurred speculation the central bank will cut interest rates from a five-year low.

Brent crude’s 15 percent slide in July is seen helping abate price pressures in Asia’s third-largest economy, which imports about three quarters of its oil. The recent strength of monsoon rains has boosted optimism that better crop output will contain food costs that make up a significant part of India’s inflation. Consumer prices rose 5.77 percent in June from a year earlier, the fastest pace in 22 months. The rupee climbed for a fifth day.

The yield on government notes due January 2026 fell two basis points to 7.14 percent in Mumbai, prices from the central bank’s trading system show. That’s the lowest close for a benchmark 10-year security since May 2013. The yield tumbled 29 basis points last month as foreign investors snapped up local debt at the fastest pace since October.

Read: Bond Buyers Can’t Get Enough as India Debt Gains Most Since 2010

“The benchmark yield’s current level is the sign of a bullish market,” said R Sivakumar, Mumbai-based head of fixed income at Axis Asset Management Co., which oversees the equivalent of $6.1 billion. “Investors expect inflation to be lower in the second half of the year, helped by a fall in oil prices and good monsoon rainfall. Domestic players are going long on bonds.”

The cost to lock in rates for a year fell four basis points to 6.47 percent, the lowest close since July 15, data compiled by Bloomberg show. The Reserve Bank of India, which next reviews monetary policy on Aug. 9, has kept the benchmark repurchase rate unchanged since lowering it to 6.50 percent in April. The June-September monsoon rainfall affects both summer and winter sowing in India. Seasonal showers for 2016 are forecast to be the highest in 22 years after back-to-back droughts.

Read: BofA Sees August India Rate Cut as Monsoon to Damp Food Prices

The rupee jumped 0.4 percent to 66.7425 per dollar, according to prices from local banks compiled by Bloomberg. It climbed to 66.6975 earlier, the highest level since June 9. The currency strengthened 0.8 percent in July, the first monthly gain since March.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE