Foreign funds boost Indian bonds' buying

Overseas holdings of rupee-denominated government and corporate notes climbed Rs 4,480 crore in the last five days

Foreign funds are boosting purchases of Indian bonds, adding strength to a rally that's seen the benchmark 10-year yield slide to the lowest level in more than two years.

Overseas holdings of rupee-denominated government and corporate notes climbed Rs 4,480 crore ($670 million) in the last five days, data from National Securities Depository show. That's helped take net inflows for March to Rs 1,720 crore, after last month's withdrawals of Rs 8,760 crore, which were the biggest since April 2014. Neuberger Berman Group LLC says Indian sovereign debt is attractive from a carry perspective amid the global environment of relaxed monetary policies.

The Federal Reserve's decision to scale back its projection for 2016 interest-rate increases and bets that the Reserve Bank of India will lower borrowing costs have added fuel to the debt rally that began with the government's February 29 Budget commitment to narrow the fiscal deficit to a nine-year low. The rupee is on course for its biggest monthly advance since March 2014 and Citigroup Inc, the world's largest currency trader, says it can outperform Asian peers should the government execute the budget plans.

"Both global and local factors have turned positive for Indian bonds recently," said Vivek Rajpal, an interest-rate strategist at Nomura Holdings Inc in Singapore. "A dovish Fed and European Central Bank have put an environment favorable for emerging-market debt."

The yield on Indian sovereign bonds due January 2026 sank to 7.50 per cent on Monday, the lowest close for a benchmark 10-year security since July 2013.

The yield -- which has fallen 26 basis points from February 26, the last trading day before the budget -- was up one basis point at 7.52 per cent as of 12:04 p.m. in Mumbai, according to prices from the Reserve Bank of India's trading system.

The rupee weakened 0.2 per cent to 66.8750 a dollar, paring its advance this month to 2.3 per cent, according to prices from local banks compiled by Bloomberg. The currency has fallen 0.6 per cent this week after three straight weeks of gains. Markets will be shut Thursday and Friday for public holidays.