Indian bonds see biggest gain in over a month; auction in focus

MUMBAI: Indian bonds posted their biggest single-day gain in a month on Wednesday as a period of relative underperformance of debt markets led to value-buying from long-term investors, who are betting the new government led by Narendra Modi will be mindful of enforcing fiscal discipline.

Gains in bonds have been relatively muted compared with the rupee, which rose to an 11-month high on Monday, or stocks, which hit an all time high on Friday, given concerns the new government led by Narendra Modi would announce a higher borrowing figure in its budget due by mid-July.

But analysts believe the new Bharatiya Janata Party government will be fiscally more prudent than anticipated by bond investors.

Liquidity was also comfortable, according to traders, further shoring up sentiment. The cash rate has hovered below 8 percent for the past five sessions to Wednesday.

"Bonds didn't rally on the view that a new budget would mean higher borrowing. But the BJP is also looking at lower interest rates and increasing borrowing will be not favourable for that. Hence they may look at other ways to meet the budget shortfall," said Debendra Dash, a fixed income dealer with DCB Bank.

The benchmark 10-year bond yield closed down 8 basis points at 8.77 percent, its biggest single-day fall since April 17. The 10-year had risen to 8.88 percent on Monday, its highest level since April 28.

Over the last five straight trading sessions, the others category of investors, including pension and insurance firms and the central bank have purchased 34.07 billion ($579.8 million) worth of bonds despite a broad selling pressure on debt.

Some traders said there was also some buying seen from foreign institutional investors (FIIs). Foreign funds have bought $1.65 billion in debt since the start of May.

Traders will also watch Friday's 160-billion-rupee auction, which includes 70 billion rupees of the benchmark 10-year bond.

India's benchmark five-year overnight swaps and the one-year rate both closed down 3 basis point each at 8.23 percent and 8.44 percent respectively.