Bonds rise on buzz of cut in debt sales

The 10-year bonds rose on speculation that slowing inflation will allow the central bank to cut debt sales intended to drain cash from the financial system. This resulted in sending yields to the lowest in more than four months,

Ten-year bond yields dropped the most since June 18 after the Reserve Bank of India (RBI0 said it will sell treasury bills worth Rs 3,500 crore ($865 million) this week, compared with an average Rs 8,800 crore of bills a week it auctioned in June.

Bonds also gained on speculation that a declining inflation rate will enable the central bank to refrain from raising interest rates.

"Bonds are rallying because the central bank didn't announce big debt sales this week, which means there'll be ample liquidity in the system,'' said M Natarajan, head of bonds and currency trading at IndusInd Bank in Mumbai.

"Now that inflation has come well below the central bank's target, its policy focus appears to be shifting away from controlling prices. The RBI won't be in a hurry to raise rates from here.''

The yield on the benchmark 7.49 per cent note due April 2017 fell 8 basis points, or 0.08 percentage point, to 7.92 per cent in Mumbai, according to the central bank's trading system. That's the lowest since February 27. The price rose 0.55, or 55 paise per Rs 100 face value, to 97.07.

The rate of annual inflation stayed near a 13-month low at 4.13 per cent in the seven days to June 23, a government report showed on July 6. The central bank wants to keep the rate below 5 per cent in the current fiscal year, which began April 1.

The Reserve Bank has raised benchmark interest rates nine times since 2004 to curb inflation. It increased its overnight lending rate to a five-year high of 7.75 percent on March 30.

The bank boosted debt sales in June to drain excess cash that threatened inflation. It wants to cut the rate of money supply growth, which has averaged 20.6 per cent since April, to at least 17.5 per cent.

"The decline in money market rates shows that the supply of cash in the banking system has improved,'' IndusInd's Natarajan said. "The surplus liquidity will continue to support bonds.''

The rate banks charge each other for overnight loans has averaged 0.72 per cent this month, compared with 2.5 per cent in June.