Bonds pare losses as call rates drop

The 10-year bonds pared losses on speculation the lowest interest rates in the local money market since December 2005 are spurring banks to buy debt with borrowed funds.

Overnight rates fell today after the central bank capped daily subscriptions by banks to its reverse repurchase auctions at one-eighth of the average amount lenders invested a day at such sales last week. The limit, which takes effect today, has spurred banks with spare cash to lend more in the money market, lowering the cost of overnight borrowings.

"The cap on the reverse repo means more money will stay in the market,'' said Neelakantan Jayashankaran, a director at CorpBank Securities, a primary dealer in Mumbai that underwrites government debt sales. "Call rates have dropped, and this will offer some support to bonds.''

The yield on the benchmark 8.07 per cent note due January 2017 was little changed at 7.94 per cent in Mumbai, according to the central bank's trading system. It had climbed to 8.01 per cent earlier in the day. The price fell 4 paise to Rs 100.85.

The yield spreads between bonds in various maturities widened. The yield spread between the 10-year bond and the 11.5 per cent note due May 2008 increased by 1 basis point to 36 basis points. The spread between the one-year security and the 8.33 per cent bond due June 2036 increased by 3 basis points to 64 basis points.

The Reserve Bank of India on March 2 capped at Rs 3,000 crore the amount of money it will absorb each day from lenders through its reverse repurchase auction. Banks put an average Rs 23,800 crore a day last week at the reverse repurchase sales.

The rate banks charge each other on overnight loans is 5.38 per cent today, compared with 6.05 per cent on March 2, according to data compiled by Bloomberg. This is the lowest since December 10, 2005.

Spare cash with banks has risen amid speculation the Reserve Bank bought dollars to stem currency volatility as capital inflows lifted the rupee to a 16-month high last month.

The country's foreign exchange reserves gained $13 billion in the three weeks through February 23, suggesting the central bank had intervened in the currency market. In all of December and November, the bank bought $5 billion, according to data on its website.

Bonds fell earlier on concern the central bank's move to increase sales this week of so-called stabilisation securities will drain cash from banks, leaving lenders with less spare funds to buy debt.