Rajan gives rupee bond bulls confidence

RBI comments triggered the biggest rally in sovereign notes in two months

Reserve Bank of India Governor Raghuram Rajan gave Indian bond bulls confidence to forecast an end to a two-month jump in yields.

Even as he left benchmark interest rates unchanged on Tuesday, Rajan said inflation risks are to the downside and he “will use the space for further accommodation, when available.” That triggered the biggest rally in sovereign notes in two months. The benchmark 10-year yield, at 7.71 per cent yesterday, will drop another 16 basis points by March 31, a Bloomberg survey of 10 fixed-income dealers and fund managers shows. It surged 25 basis points in the previous two months, the most since the period ended September 2013.

Deutsche Asset Management of the proposed pay raise that risks stoking prices, according to its statement Tuesday. The monetary authority, which will next review rates on February 2, is prepared to act outside policy dates if warranted, Rajan said during the post-policy press conference.

“The RBI is confident of fiscal consolidation and assesses the balance of risks for the inflation outlook to be to the downside,” Citigroup economists led by Samiran Chakraborty in Mumbai, wrote in a note. “This stance is decidedly dovish relative to current market pricing. We expect investors’ optimism will grow alongside lower global oil prices. We expect lower yields and a stronger rupee in response,” they wrote.

Foreign holdings of sovereign and corporate debt fell Rs46.9 billion in November, the most since May, amid increased odds that the Federal Reserve will raise interest rates at its December 15-16 meeting.