Bonds plunge on inflation fears

MARKET ROUND-UP

The 10-year bonds fell for a fourth day, sending yields to the highest in more than a week, on speculation a report tomorrow will show the inflation rate rose to a two-year high.

Yields rose the most in almost three weeks as a government report tomorrow will show wholesale prices rose 6.48 per cent, the fastest since December 2004. The Reserve Bank of India (RBI) last week raised its overnight lending rate for the fifth time in a year to 7.5 per cent to curb inflation.

"The outlook for bonds remains negative as inflation will accelerate further and we will see some more hardening of interest rates,'' said M Natarajan, head of trading at IndusInd Bank in Mumbai. "Tomorrow's inflation report could show a higher number.''

The yield on the benchmark 8.07 per cent note due January 2017 rose 5 basis points, or 0.05 percentage, to 7.8 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system.

The price, which moves inversely to the yield, fell 0.34 per cent, or 34 paise to the rupee, to 101.81. Bonds gained earlier as a decline in the borrowing costs in the local money market signalled banks have more spare cash to invest in debt securities.

"Bonds gained modestly in the morning because the call money rate has softened,'' said Paresh Nayar, chief trader at Development Credit Bank in Mumbai. "Also, the yields set at yesterday's treasury bill auctions were lower, indicating better investor sentiment.''

A drop in banks' daily borrowings from the RBI showed spare cash in the banking system has increased.

Banks didn't take loans from the central bank today, after borrowing Rs 4,700 crore ($1.1 billion) yesterday and Rs 6,200 crore the day before, according to the RBI data.

The overnight money market rate fell to 6.38 per cent from 7.65 per cent yesterday.

The government yesterday sold Rs 2,000 crore of 91-day treasury bills at 7.52 per cent yield, compared with 7.56 per cent at the previous such auction. It sold six-month bills at 7.62 per cent, compared with a yield of 7.75 per cent at the previous sale.

Surplus cash in the banking system increased probably due to foreign exchange purchases from the local currency market by the Reserve Bank of India, said R V S Sridhar, vice-president of treasury at UTI Bank in Mumbai.