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MUMBAI: Benchmark government bonds posted their biggest daily gains in nearly four weeks Friday, as a rebounding rupee gave temporary relief in a tough month for debt markets that was marked by heavy selling from foreign investors.
Foreign investors pared holdings in emerging markets in June due to fears of an early end to the U.S. monetary stimulus. India has been particularly vulnerable due a current account deficit that hit a record high of 4.8 percent of gross domestic product in the fiscal year ended in March.
Foreign investors sold a net of $5.57 billion this month as the falling rupee as well as waning differentials with U.S. Treasuries, soured their outlook on domestic bonds.
The falling rupee has also offset hopes the Reserve Bank of India would cut interest rates further, and made the outlook on inflation much more uncertain, although wholesale prices have recently fallen.
Still, some analysts said recent bond losses may be overdone, and expect some consolidation in the near-term.
"At this juncture, the predominant concern is the external account vulnerability and the rupee, but the backdrop of falling inflation should keep the bias to buy active," said Suyash Choudhary, head fixed income at IDFC Mutual Fund.
"Unless rupee becomes disruptive, it is likely that when the currency stabilises, buying comes back to the bond market," Choudhary added.
The benchmark 10-year bond yield fell 12 basis points on the day, its biggest fall since June 3.
Total volume on the central bank's electronic trading platform was at 422.25 billion rupees, little lower than the average 500 billion rupees seen until mid-June.
The big gains on Friday allowed 10-year yields to end flat for the month, although bonds are still sitting on sizeable gains for the quarter, with yields down 51 basis points (bps) for the April-June quarter.
That marked the biggest quarterly fall in yields since the December quarter of 2008, as the RBI cut interest rates by 25 bps this quarter, and an additional 50 bps in the January-March quarter.
Friday's sale of 140 billion rupees of federal bonds drew bullish cut-offs at the debt sale, also helping sentiment.
The five-year OIS rate down 8 basis points to 7.34 percent and the one-year rate fell 8 basis points to 7.48 percent.
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