A rally in India’s sovereign bonds by mutual funds and foreign investors after weeks of gloom has left most traders in Mumbai baffled by their sudden fortunes.
Yields fell across the curve last week, with the benchmark 10-year bond falling ten basis points, the biggest weekly decline since April. Government debt auctions are finding buyers again, as earlier sales were canceled or salvaged by underwriters.
“The sudden demand is surprising,” said Ritesh Bhusari, deputy general manager of treasury at South Indian Bank Ltd. “Low inflation trajectory for the next two months and global factors are supporting this.”
There was a quick turn in sentiment after the benchmark 10-year yield hit the highest level since March, fueled by the Reserve Bank of India’s policy review on August 6, where a member disagreed on the accommodative stance. Subsequent minutes showed that more members indicated that excess liquidity could be curtailed. While many traders remain surprised about the market turnaround, others have suggested that lower-than-expected growth for the June quarter and softer inflation expectations in the coming readings may have prompted investors to recalculate.
Bloomberg data shows mutual funds have become net buyers with debt purchases worth Rs 151 billion ($2.1 billion) in the last 10 trading days. Foreigners were also tempted after a long break after a sharp rise in the rupee.
Foreign investors raised bonds worth Rs 28.2 billion under the so-called fully accessible route, where there is no cap on overseas purchases, and Rs 15.2 billion under the general category since the last week of August. A special route for long-term foreign investors called the Voluntary Retention Route also suddenly exhausted all of its Rs 906 billion quota.
While the August 31 GDP release helped, it is likely that Federal Reserve Chairman Jerome Powell’s comments in Jackson Hole reassured global investors that the US central bank would be gradual in removing the stimulus. This has fueled the risk sentiment globally.
Vikas Goel, CEO, PNB Gilts Ltd. said, “The GDP figures have changed the sentiment and indicate that the RBI will continue with its extended stance.” “I do not expect any hike in reverse repo this year.”
This story has been published without modification in text from a wire agency feed. Only the title has been changed.
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