Bonds gain as market bets fuel price hike will cut deficit

Bonds gained on speculation an increase in fuel prices last week will help the government trim the budget deficit from a 16-year high.

Bonds also advanced after leaders from the Group of 20 nations agreed targets to improve fiscal discipline. The government plans to reduce the deficit to 5.5% of the gross domestic product in this fiscal ending March from 6.9% last year, reducing pressure on the market from bond sales.

“The fiscal position looks more convincing and that is having a straight bearing on the sentiment,” said Devendra Das, a fixed-income trader at Development Credit Bank in Mumbai. “The outlook is more optimistic for bonds than in the recent past.”

The yield on the 7.80% note due May 2020 fell 6 basis points to 7.59% at the close of trade on Monday. The price rose 0.41, or 41 paise per Rs 100 face amount, to 101.41.

Bonds pared gains after RBI deputy governor KC Chakrabarty said the central bank may raise interest rates before its July 27 policy meeting to curb inflation.

The country’s inflation rate was 10.2% in May, near the highest level in 17 months. RBI raised its benchmark rate by a quarter percentage point each in March and April to 3.75%.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, was little changed. The rate, a fixed payment made to receive floating rates, was at 5.56%, compared with 5.57% the previous close.