Bloomberg News

India’s Bonds Rally on RBI Debt Purchase Plan; Rupee Weakens

November 17, 2011

Nov. 17 (Bloomberg) -- India’s 10-year bonds rose, pushing yields to this month’s lowest level, after the central bank said it will purchase government debt for the first time since January. The rupee weakened.

The Reserve Bank of India will buy 100 billion rupees ($2 billion) of securities at an open-market auction on Nov. 24, it said in a statement yesterday, resuming such purchases after 10 months. Bonds also gained as the finance ministry increased the overseas investment ceiling in government and corporate debt by $5 billion each.

“The announcements have improved sentiment among investors,” Dhawal Dalal, the Mumbai-based head of fixed income at DSP Blackrock Investment Managers, said today. “Yields may move down gradually over the medium term but uncertainty over the government’s borrowing program and concern over inflation remain.”

The yield on the 8.79 percent security due November 2021 declined seven basis points, or 0.07 percentage point, to 8.81 percent in Mumbai, according to the central bank’s trading system. That’s the lowest level for benchmark 10-year yields since Oct. 27.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, fell eight basis points to 8.09 percent, according to data compiled by Bloomberg.

‘Tactical’ Move

The Reserve Bank’s planned bond repurchases aim to ease a cash shortage in the financial system and don’t signal a change in the drive to curb inflation, Deputy Governor Subir Gokarn said today.

“We made a judgment that there is going to be some persistent shortage for the next few weeks, so that has motivated our open-market operations,” Gokarn told reporters. The move is “tactical” and “does not send a signal of change in the monetary policy stance,” he said.

Indian inflation, measured by the benchmark wholesale-price index, accelerated to 9.73 percent in October. The RBI’s repurchase rate is 8.5 percent.

The rupee weakened toward a 2 1/2 year low, touched this week, after Fitch Ratings said Europe’s debt crisis may pose a “serious risk” to U.S. banks, fueling concerns of contagion and cooling demand for emerging-market assets. Fitch said yesterday the credit outlook for the U.S. banking industry may worsen unless the crisis is “resolved in a timely and orderly manner.”

Capital Flows

Indian stocks tumbled the most in Asia, tracking global equities. The BSE India Sensitive Index, or Sensex, dropped for the sixth day, its longest streak of losses in more than three months. Overseas investors sold a net 3.77 billion rupees of Indian stocks on Nov. 15, paring their investment in equities this year to 33.6 billion rupees, according to data on the website of the market regulator.

“The outlook for the rupee is bleak as capital flows have dried up,” said Vikas Babu, a currency trader in Mumbai at Andhra Bank. “Europe’s debt crisis is deterring investors from emerging market assets.”

The rupee depreciated 0.3 percent to 50.9050 per dollar in Mumbai, according to data compiled by Bloomberg. The currency touched 50.9550 yesterday, the weakest level since March 2009.

--Editors: Abhay Singh, Sam Nagarajan

To contact the reporter on this story: V Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net


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