Indian 10-Year Bonds Complete Biggest Weekly Gain Since March

(Bloomberg) -- India's 10-year sovereign bonds completed their biggest weekly gain in almost four months as a revival in monsoon rains eased concern about a surge in inflation.

The rainfall deficit shrunk over the past fortnight to 12 percent below normal from 25 percent in mid-June, according to the weather department. The U.K.'s decision to exit the European Union has also fueled speculation that global central banks will keep injecting money to support their economies, while traders abandoned bets that the Federal Reserve will raise interest rates this year.

“The revival in the monsoon is positive for food costs and overall inflation, and that's supporting the bonds,” said Vijay Sharma, executive vice-president for fixed income at PNB Gilts Ltd. in New Delhi. “Optimism that global central banks will keep monetary policy easy and the Fed won't raise rates soon has also added legs to the rally.”

The yield on the notes maturing January 2026 fell six basis points for the week to 7.42 percent in Mumbai, according to prices from the central bank's trading system. That's the biggest drop since March 18. The yield retreated three basis points Friday.

For the June-September season rainfall is forecast to be above average, easing two years of drought and allaying concern that crop prices will soar. Reserve Bank of India Governor Raghuram Rajan left interest rates unchanged last month at a five-year low and said a strong monsoon, astute food management and increased supply of goods and services were needed to offset higher inflation.

Fed Outlook

Futures show almost no chance for a Fed interest-rate increase this year, helping quell concern that higher U.S. rates would diminish the appeal of developing-nation assets.

State-run lenders were net buyers of 67.6 billion rupees ($1 billion) of government bonds Thursday, the most in 14 months, data from Clearing Corp. of India Ltd. show.

The rupee strengthened on optimism the economy will be among the least impacted in Asia by the Brexit vote, given the relatively low export exposure with the U.K. Those shipments were just 3.4 percent of the South Asian country's total exports in the year ended in March, government data show.

The rupee rose 1 percent from June 24 to 67.3225 per dollar in Mumbai, prices from local banks compiled by Bloomberg show. It climbed 0.3 percent on Friday. The currency has weakened 1.7 percent in 2016, Asia's worst performer after the Chinese yuan.

To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net. To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Simon Harvey