India’s 10-year bond yields were near the lowest level in almost a month on speculation that slowing economic growth would prompt the central bank to temper the pace of interest-rate increases.
Factory output rose 5.6 per cent from a year earlier in May, the slowest pace of expansion since August 2010, the Central Statistical Organisation said last week. Rising funds at banks also boosted demand for public debt. Bank deposits, of which 24 per cent must be invested in government bonds, increased 2.3 per cent to a record $1.23 trillion in the week ended July 1, central bank data show.
“Economic growth has deteriorated quite a bit, supporting bonds,” said Alok Singh, a Mumbai-based fund manager at BNP Paribas Asset Management India Pvt. “Deposit growth will remain strong and that will trigger some demand.”
The yield on the 7.8 per cent government notes due April 2021 was 8.26 per cent at the close in Mumbai, according to central bank data. Earlier, it touched 8.22 per cent, the lowest level since June 20.
The monetary authority is likely to boost the rate by as much as 50 basis points more before pausing its current run of increases, Singh said. The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, fell one basis point today to 7.91 per cent.
The rupee strengthened, snapping a two-day decline, after overseas investors stepped up purchases of the nation’s shares to take advantage of growth in Asia’s third-largest economy.
Foreign funds added an average $135 million a day to holdings of Indian equities this month, compared with $35 million per day in June, according to exchange data. The Bombay Stock Exchange’s benchmark Sensitive Index rose 0.8 per cent, the most in a week.
“We are seeing some capital inflows into equities and this is helping the rupee,” said Naveen Raghuvanshi, a Mumbai-based currency trader at Development Credit Bank Ltd.
The rupee rose 0.2 per cent to 44.50 at the close in Mumbai, according to data compiled by Bloomberg. It fell 0.4 per cent last week, the biggest drop since the period ended May 6.
Offshore forwards indicate the rupee would trade at 45.01 in three months, compared with expectations for a rate of 45.13 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
Call rate declines
The call rate declined to end at 7.60 per cent at the overnight call money market here today on surfeit of liquidity in the banking system. The overnight call money rate closed lower than yesterday’s closing of 7.70 per cent. It moved in a range of 7.75 per cent and 7.45 per cent.