India’s 10-year bonds gain as inflation slows

MUMBAI — India’s 10-year bonds advanced for a second day after an August 31 government report showed inflation slowed to the least in 16 months. Wholesale prices gained less than 4 per cent, the government’s target, for the first time since April 2006.

By (Bloomberg)

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Published: Tue 4 Sep 2007, 9:25 AM

Last updated: Sat 4 Apr 2015, 11:32 PM

Bonds also rose on optimism central banks worldwide will start cutting or stop raising interest rates to reduce the impact of the U.S. subprime credit rout on economic growth.

“Bonds surely have a positive outlook, at least for the short term,” said Amandeep Chopra, who manages the equivalent of $5.4 billion in Indian debt at UTI Asset Management Co. in Mumbai. “Inflation is well into a comfort zone as far as policy makers and the market are concerned.”

The yield on the benchmark 7.49 per cent note due April 2017 fell 1 basis point, or 0.01 percentage point, to 7.92 per cent as of 2:29 p.m. in Mumbai, according to the central bank’s trading system. The price, which moves opposite to the yield, rose 0.06, or 6 paise per 100 rupee face value, to 97.13. The 10-year yield may decline to 7.85 per cent in the next two weeks, Chopra said. The median forecast for the rate at the end of this month in an August 22 Bloomberg News survey of eight analysts was for 7.95 per cent.

Inflation slowed to 3.94 per cent in the week ended August 18 from 4.10 per cent the previous week, the Ministry of Commerce and Industry said on August 31.The central bank wants to cap weekly gains in wholesale prices at 5 per cent through the fiscal year that started April 1. The inflation rate has remained below this level since June 9. Finance Minister Palaniappan Chidambaram aims to lower the rate, which averaged 4.96 per cent this fiscal year, to 4 per cent.

Fund Outflows

Bonds pared gains on concern government debt sales and corporate tax payments will drain money from the financial system, leaving investors with less spare cash to buy debt. India will sell bonds worth Rs70 billion ($1.7 billion) on September 7. Companies must pay by September 15 the third installment of taxes for the fiscal year.

“The market is a bit cautious, since auctions and tax outflows are lined up,” said K. Ramkumar, who manages the equivalent of $1.3 billion in debt at SBI Funds Management Ltd. in Mumbai. Bonds also gained on speculation the US Federal Reserve may cut its benchmark interest rate this month, prompting the Indian central bank to refrain from raising rates. “Global factors also appear to be favourable for the bond market for now,” UTI’s Chopra said. “A rate cut by the Fed would boost market sentiment. The European Central Bank also may have adopted a neutral stance.”

The Reserve Bank of India has increased borrowing costs nine times since October 2004 to curb inflation. The bank, which raised its repurchase rate to a five-year high of 7.75 per cent on March 30, left it unchanged at its April and July quarterly meetings

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