April 9, 2013 / 12:04 PM / 5 years ago

Indian bonds gain, but foreign investors sell

* 10-year bond yield ends 3 bps lower at 7.88 pct
    * Inflation, industrial production data awaited
    * Overall FII interest in debt to remain strong - IDFC MF

    By Archana Narayanan
    MUMBAI, April 9 (Reuters) - India's benchmark 10-year bond
yield fell to a new three-week low while short-end swap rates
hit their lowest in 20 months as a debt rally extended to a
third session on rising hopes the central bank has room to cut
interest rates next month.
    Hopes the Reserve Bank of India could cut the key lending
rate for a third time this year at its policy review on Friday
are rising ahead of data on Friday expected to show a
contraction in industrial output and data on Monday expected to
show slowing wholesale price inflation. 
    Value buying was also helping markets, as the 10-year yield
rebounded from the yearly high of 8 percent hit last week, when
investors had worried about data showing a record high current
account deficit and concerns about political stability.
    However, foreign institutional investors continued to sell
debt for a fourth consecutive session on April 5, in the latest
available regulatory data, bringing the four-day total to
$710.68 million.
    "Market positioning had turned favourable in the recent sell
off, as most participants had lightened positions considerably,"
said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.
    "This, along with expectations of benign data prints on
inflation and current account due over the next few days, has
triggered the rally." 
    The benchmark 10-year bond yield closed down
3 basis points at 7.88 percent, after touching 7.87 percent, a
level last seen on March 19. 
    One-year interest rate swaps were within
striking distance of a 20-month low, at 7.3950 percent during
the day. It ended at 7.40 percent, down from the previous close
of 7.42 percent.
    The benchmark five-year swap rate touched
7.1650 percent during the day, a level last seen on March 19. It
ended at 7.18 percent, lower than 7.20 percent on Monday.
    The RBI has cut interest rates by 25 basis points each in
January and also in March, bringing the rate down to 7.50
percent, in a bid to stimulate growth, but warned that further
easing would depend on inflation easing and how the current
account deficit is controlled. 
    Although foreign selling is sparking concerns, Choudhary
expects the overall FII interest in debt to remain strong after
India simplified some of the regulations behind buying domestic
    Liquidity conditions are also expected to ease as the
government is expected to spend some of its cash balances,
dealers said.
    Banks borrowed 1.09 trillion rupees from the central bank's
repo window. 
    India will auction 150 billion rupees worth of bonds on
Friday, the central bank said late on Monday. The papers
announced were in line with expectations, traders said.

 (Editing by Anand Basu)

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