Bonds up on debt sale buzz

MARKET ROUND-UP

Bonds rose for a fourth day, the longest rally in almost three months, on speculation the government will reduce or cancel a planned debt sale next month after tax revenue rose more than forecast.

The government is scheduled to sell Rs 8,000 crore of bonds at two auctions between March 2 and March 9, according to its borrowing calendar. The sales will be the last of the current financial year, which ends March 31.

"There is optimism among traders the sale will be cancelled or the size will be reduced,'' said Akshat Lakhera, a bond trader in Mumbai at HDFC Bank, the country's third-biggest lender by market value. "It will ease pressure on yields given the fact there is not much surplus money in the banking system.''

The yield on the benchmark 8.07 per cent note due January 2017 fell 8 basis points, or 0.08 percentage to 7.92 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. That's the biggest slide in yield in February. Yields move inversely to prices. The bond price rose 0.55, or 55 paise, to Rs 101.

Direct tax revenue from companies and personal incomes rose 41.2 per cent in the 10 months through January 31, the ministry of finance said on February 2. The government had forecast a 27.5 per cent increase in tax for the full financial year.

Total tax income for the 10 months totalled Rs 1.56 trillion, the finance ministry said.

Bonds pared gains on speculation banks, the biggest buyers of government debt, will sell some of their securities after the central bank on February 12 asked lenders to keep more cash aside to cover their deposits.

"The bond market is already feeling the pinch in terms of liquidity after the first stage of the cash reserve ratio increase,'' said Dhawal Dalal, senior vice-president and head of fixed-income trading at DSP Merrill Lynch Investment Management in Mumbai.

The month of "March is going to be excruciating, given the next phase of the cash reserve increase''.

The Reserve Bank of India last week said it would increase the cash reserve ratio by half a percentage in two equal stages, the first of which took effect on February 17 while the second becomes effective on March 3.

The decision will drain Rs 14,000 crore from the banking system, reducing the cash available to banks to buy debt.