Rate-Cut Bets Drive Indian Bonds to Best Weekly Gain in a Month

Updated on
  • Yield on 10-year note seen at 6.50 percent by March: Edelweiss
  • Indian rupee weakens, ending two-week winning streak

Indian sovereign bonds completed their biggest weekly advance since early September on speculation the central bank will ease borrowing costs further.

The six-member Monetary Policy Committee led by newly-appointed Reserve Bank of India Governor Urjit Patel took the country’s first collective interest-rate decision Tuesday, moving to cut the benchmark repurchase rate to a more than five-year low of 6.25 percent. That was after consumer-price inflation slowed to a five-month low in August. Economists at Morgan Stanley, Nomura Holdings Inc. and Bank of America Merrill Lynch are among those predicting more easing, with some anticipating a reduction as early as December.

The yield on government notes due September 2026 slumped eight basis points this week, the most since the period ended Sept. 9, to 6.73 percent in Mumbai, according to the RBI’s trading system. It fell to 6.68 percent on Wednesday, the lowest close for a benchmark 10-year security since June 2009. The daily trading volume for government securities on the RBI’s dealing platform surged to an unprecedented 1.66 trillion rupees ($24.9 billion) that day.

“Markets believe there is more room for policy rates to come down,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “The yield on the benchmark note could ease to 6.50 percent by end-March.”

India sold 150 billion rupees of bonds, including 30 billion rupees of new 30-year debt, as planned at an auction Friday, according to statement from the central bank. Ten-year notes fell on Thursday and Friday on speculation the drop in the yield to seven-year lows has deterred some buyers ahead of a closely watched U.S. jobs report. The yield rose three basis points on Friday.

The rupee ended a two-week winning streak. The market-implied probability of a Federal Reserve rate increase this year has climbed to 64 percent from 51 percent at the start of last week, after data showed the fastest expansion in U.S. services companies in almost a year and a rebound in manufacturing.

The currency weakened 0.1 percent from Sept. 30 to 66.6850 a dollar, prices from local banks compiled by Bloomberg show. It was little changed on Friday.