World Economy

India Banks in Bond-Buying Spree

Urjit PatelUrjit Patel

Indian state-run banks bought a record amount of sovereign bonds Monday after a selloff following the naming of Urjit Patel as the next central bank governor pushed yields to the highest in almost seven months.

National lenders, the biggest holders of the debt, bought a net 133.9 billion rupees ($2 billion) of securities, the most in Clearing Corp. of India data compiled by Bloomberg since 2006. Foreign and private sector banks were net sellers of the notes after the government over the weekend said Patel will succeed Raghuram Rajan at the helm of the Reserve Bank of India next month.

“With credit growth still slow, state-run banks are deploying funds to buy bonds,” said Ajay Manglunia, Mumbai-based head of fixed income at Edelweiss Financial Services Ltd. “During a rally they sell and book treasury profits to support their earnings, which have been weighed down by higher provisioning for bad loans.”

The yield on notes due January 2026 was little changed at 7.16% in Mumbai, prices from the central bank’s trading system show. It surged six basis points on Monday, the most since Feb. 2. Edelweiss termed the sell-off as a “knee-jerk” reaction to Patel’s appointment, and said it expects yields to decline over the course of the year.

Indian bonds joined a global debt rally in July, with 10-year notes climbing the most since 2013, as a revival in monsoon rains, improving domestic liquidity and speculation the new RBI chief will be more aggressive in lowering interest rates spurred demand.

  Disappointed Appointment

Dsiatel’s appointment disappointed some investors because his role in pushing through the adoption of India’s inflation target aligns him with Rajan, who has resisted pressure to lower borrowing costs further.

The rupee rose 0.1% to 67.09 per dollar on Tuesday, according to prices from local banks compiled by Bloomberg. The currency has fallen 1.4% this year, the worst performance in Asia after China’s yuan.

Indian shares were little changed as investors awaited cues on whether the Federal Reserve would raise US interest rates this year.

As the earnings season draws to a close, investors’ focus will shift to Federal Reserve Chair Janet Yellen’s speech on Friday at the annual central bankers’ meeting in Jackson Hole, Wyoming, to assess the odds of an interest rate hike in the coming months.

Foreign investors have been buying into Indian shares apart from those in other emerging markets this year, with Friday marking their 30th consecutive session of purchases, bringing the total net investments in the year to $5.85 billion