Bonds advance on CRR sop

MARKET ROUND-UP

Bonds rose after the central bank last week said it will pay interest on reserves it holds for banks, the biggest buyers of government debt.

The Reserve Bank of India said after the close on February 23 that it will back date the interest to June 2006 when it discontinued such payments.

The central bank will pay a rate of 1 per cent on reserves maintained from February 17, it said. Lenders will be able to use the interest to purchase bonds.

"It's a big relief for banks particularly at a time when they have to depend on the central bank for funds,'' said K P Suresh Prabhu, chief of fixed-income at HDFC Bank in Mumbai.

"It will boost banks' profits and should increase demand for bonds.'' The yield on the benchmark 8.07 percent note due January 2017 fell 4 basis points, or 0.04 percentage point, to 7.89 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. The price rose 0.28, or 28 paise per Rs 100 face value, to 101.22. Bond yields move inversely to prices.

The central bank has asked lenders twice in the past three months to increase the cash they set aside to cover deposits.

Lenders have to keep cash equivalent to 6 percent of deposits starting March 3, the Reserve Bank said February 13. That will drain as much as Rs 140 billion ($3.2 billion) from the banking system.

It had asked banks in December to raise reserves to 5.5 per cent from 5 per cent. Bonds pared gains on speculation the central bank will increase interest rates in its monetary policy in April to curb inflation, fuelled by record economic growth.