Patel Cash Boost Helps India Bond Yields Reclaim Seven-Year Lows

  • RBI to buy up to 100 billion rupees of debt on Thursday
  • Trust Capital sees yield on new 10-year bond dropping to 6.50%

Indian sovereign bonds rallied, driving the benchmark 10-year yield to its lowest close in seven years, as the central bank sought to add more cash through debt purchases.

The Reserve Bank of India will buy as much as 100 billion rupees ($1.5 billion) of notes via its open-market operations on Thursday, according to a statement after the close of markets Tuesday. That will be the first OMO purchase under Governor Urjit Patel, who took charge on Sept. 4. The monetary authority has already infused about 900 billion rupees in the year that began April 1.

“Right at the outset, the new Governor has sent a strong statement of intent on liquidity,” said Sandeep Bagla, Mumbai-based associate director at Trust Capital Services India Pvt. “With expectations that inflation will ease in the coming months” and OMOs will continue, “there is limited downside for the bond market.”

The yield on government notes due January 2026 dropped four basis points to 7.06 percent in Mumbai, prices from the RBI’s trading system show. That’s the lowest close for a benchmark 10-year security since August 2009. The yield on the new 10-year debt issued last week slumped 10 basis points to 6.82 percent. Trust Capital expects it to fall to 6.50 percent by the end of the year.

OMOs Since April 1

DateAmount of Bonds Purchased
(In billions of rupees)
April 7150
April 28150
May 10100.14
May 25150
May 31150
June 20100
Aug. 11100

The central bank’s cash injections have come as it looks to tackle an outflow of about $20 billion seen triggered by the maturing of some foreign-currency deposits that Patel’s predecessor and former boss Raghuram Rajan raised in 2013 from non-resident Indians to support the local currency.

For a story on how RBI’s debt purchases are seen spurring bonds, click here.

“The most interesting aspect of recent buybacks is the RBI’s willingness to infuse liquidity into the banking system even when total system liquidity is in surplus,” Vivek Rajpal and Prashant Pande, Singapore-based strategists at Nomura Holdings Inc., wrote in a report Wednesday. “We suggest investors stick with a bullish bias in bonds. We continue to believe that liquidity and OMO purchases will continue to exert downward pressure on yields in coming months.”

India’s rupee rose for a sixth day, climbing 0.2 percent to 66.3675 per dollar, according to prices from local banks compiled by Bloomberg. It reached 66.3275 earlier, the strongest level since May 3.

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