MUMBAI: Indian government bonds rose to a two-week high on Thursday after the current account deficit narrowed sharply, providing further comfort on the country's external situation and helping spark rallies in both the rupee and shares.
The current account deficit for the October-December quarter narrowed to $4.2 billion, or 0.9 percent of the gross domestic product (GDP), from $31.9 billion a year ago, or 6.5 percent.
Foreign investors have been big buyers of short-term debt like treasury bills in recent sessions, according to traders, providing a measure of confidence amid lingering tensions in Ukraine, although geopolitical risks are seen receding.
"Policymakers still have to walk the straight-and-narrow when it comes to monetary, fiscal, and structural policies to make sure the deficit remains contained and of higher quality," said Leif Eskesen, chief economist for India at HSBC.
The benchmark 10-year bond yield fell 5 basis points to 8.79 percent. It fell to 8.78 percent during the session, a level last seen on Feb. 21.
Strong buying by foreign investors, worth nearly $5 billion so far this year, is helping support bonds, with the Reserve Bank of India expected to keep interest rates steady after raising rates in January by 25 bps, its third quarter-percentage point hike in five months.
Overseas buying helped the benchmark BSE share index hit a record high this year, while the rupee hit its highest since late November.
In the overnight indexed swap market, the benchmark five-year swap rate closed 2 bps lower at 8.51 percent while the 1-year rate ended 1 basis point higher at 8.67 percent.
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