Bond yields may reach new lows

Business Asia, March 3, 2000

Anyone looking for signs of health in the world's second-most populous nation need look no further than the Indian bond market.

The benchmark 10-year yield, now 10.53 per cent, may fall below 10 per cent this year, a level not seen since the government began selling bonds at market rates eight years ago.

These bonds have handed investors returns of more than 18 per cent in 1999 and 6 per cent already this year.

The central bank having trimmed inflation from 16 per cent in 1991 to 2.9 per cent, is lowering rates to spur the economy.

The government is likely to outline new steps to reduce its budget deficit and bond sales. At stake is whether the measures will produce an economy attractive to investors.

The moves have helped the 6-trillion-rupee (US$137 billion) bond market so far, and fund managers see gains ahead.

"Interest rates are headed down," said Vineet Udeshi, who handles 15 billion rupees of debt at Alliance Capital Mutual Fund in Mumbai and has bought India bonds this year.

As bonds rallied, yields dropped almost 1 percentage point in 1999 and another 70 basis points since the start of 2000. They will likely drop another 53 basis points to fall below 10 per cent, said N. Venkatramanan, a trader at Deutsche Bank

Declining budget deficits mean the government doesn't have to sell as many bonds, which brings rates down as investors vie for the securities still available.