India Joins Global Rally as Bond Yields Slide to Three-Year Low

(Bloomberg) -- Indian sovereign bonds rose, driving the 10-year yield to its lowest since 2013, as improving financial-system liquidity and the prospect of a reduction in benchmark interest rates spurred demand for debt.

A key overnight interbank rate has averaged 6.33 percent so far this month, compared with 6.46 percent for all of June, data compiled by Bloomberg show. A pickup in monsoon rains has boosted optimism that better crop output will help contain food costs, thereby keeping inflation in check and providing the Reserve Bank of India room to cut borrowing costs from a five-year low. The RBI has injected 800.1 billion rupees ($11.9 billion) through open-market debt purchases since April 1.

Demand for haven assets picked up globally as investor sentiment took a knock in the wake of Britain's vote to exit the European Union. The yield on U.S. Treasuries due in a decade sank to an unprecedented 1.32 percent in the last session, while that on similar-maturity Australian government bonds also touched a record low of 1.84 percent. Foreign holdings of rupee-denominated debt rose by 10.5 billion rupees last week, the most since the period ended April 22, National Securities Depository Ltd. data show.

The yield on 10-year Indian sovereign notes fell one basis point from Tuesday to 7.38 percent in Mumbai, its lowest close since June 2013, prices from the central bank's trading system show. Markets were shut Wednesday for a holiday. The yield slipped four basis points on Tuesday, the most since early April. It rose one basis point in the last two months.

‘Definitely Helping'

“The improved liquidity is definitely helping the bond market,” said Debendra Kumar Dash, a Mumbai-based trader at DCB Bank Ltd. “The sharp drop in yields globally is also supporting the positive sentiment. If the liquidity conditions remain good and overnight rates remain anchored, the yield may drift to 7.25 percent over the course of the year.”

The core banking-system liquidity stood in a surplus of 613.75 billion rupees as on July 5, according to calculations by Kotak Mahindra Bank Ltd. That compares with a deficit of 1.5 trillion rupees at the end of March. India's June-September monsoon rains affect both summer and winter sowing. A boost to farm output can help curb consumer food prices, which rose 7.55 percent in May, contributing to the fastest inflation in 21 months.

India's rupee rose 0.1 percent to 67.3975 a dollar on Thursday, according to prices from local banks compiled by Bloomberg. The currency has weakened 1.8 percent in 2016.

To contact the reporter on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net. To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Shikhar Balwani