Bond trading hits record in January on rate cut buzz

Trading in India's government bonds rose to a record last month as demand for debt increased on speculation that policy makers will cut borrowing costs for the first time in five years.

Transactions climbed to Rs 3.14 trillion ($80 billion), triple the monthly average for 2007, according to data from Mumbai-based Clearing Corporation of India. The benchmark yields fell to the lowest in a year in January on speculation that slower inflation and signs of faltering global growth will add pressure on India's central bank to lower its benchmark rate.

"There is more optimism on bonds as expectations of a decline in rates are now stronger," said Pradeep Madhav, chief operating officer, Securities Trading Corporation of India, a Mumbai-based primary dealer that underwrites government debt.

"Inflation is within target and credit growth has slowed. Some lenders have already started cutting the rates," he said.

Trading increased from Rs 1.38 trillion in December and Rs 867 billion in January 2007. The previous monthly record for trading of Indian debt was Rs 2.3 trillion in July.

Transactions totaled more than Rs 219 billion on January 22, the most in a day.

JPMorgan Chase predicts Indian bonds will gain in 2008 for the first time in five years, with 10-year yields falling to 6.8% by the end of December.

The yield on the most-traded 7.99% note due 2017 fell 28 basis points last month, the most since July. The note yielded 7.52% as of 2:07 pm in Mumbai, according to the central bank. A basis point is 0.01 percentage point.

Lower rates
The Reserve Bank of India, which has kept its repurchase rate at the highest in almost in six years since March 2007, will lower the rate by a quarter percentage point this year, according to JPMorgan. The central bank, which last cut rates in 2003, left borrowing costs on hold at a quarterly meeting on January 29.

Finance Minister Palaniappan Chidambaram said last month he would like a "moderation" in interest rates to stimulate investment and consumption. Housing Development Finance Corporation, India's biggest mortgage finance company, said on January 31 that it would cut lending rates for the first time in almost five years.

Inflation has stayed below the central bank's 5% target level since June. The annual inflation rate was 3.93 per cent in the week ended January 19. Overseas investors bought $487 million of Indian debt in January as they sold a record $4.3 billion in local stocks on signs of faltering global growth. Global funds bought a record $2.3 billion in Indian debt in 2007.

'Mostly Done'
The rally in bonds may stall on concern the inflation rate will rise, said Manoj Swain, head of debt trading at Standard Chartered in Mumbai. Reserve Bank Governor YV Reddy said last week the risk of inflation dominated his decision to keep rates unchanged.

"The rally may be mostly done for the moment," Swain said. "The central bank remains concerned about inflation." Indian bonds are the second best performers in the past 12 months among 10 Asian local currency debt markets outside of Japan with a 9.5% return, according to HSBC Holdings. Bonds in Hong Kong returned 10.8%.

Bonds may still gain as a global economic slowdown adds pressure on the Indian central bank to lower borrowing costs, said Amandeep Chopra, who manages the equivalent of $5.1 billion in Indian debt at UTI Asset Management in Mumbai.

The Federal Reserve cut its key rate by 1.25 percentage points in January, the steepest reduction since 1990, stoking concern the world's biggest economy is slipping into a recession. The global economy will grow 3.6 per cent this year, down from an earlier forecast of 4.3 per cent, UBS AG said January 25.

"Indian rates have peaked and the evolving situation is going to be a lot more bond-positive. We recommend buying bonds," Chopra said.