High call rates dent bonds

MARKET ROUND-UP

India's 10-year bonds dropped for a third day as the cost of overnight funds rose to the highest this year, making it more expensive to purchase debt with borrowed money.

The overnight money market rate climbed as high as 19.5 per cent, the most since Dec. 29, according to data compiled by Bloomberg.

The rate jumped after surplus cash in the banking system dwindled as companies last week paid their final instalment of advance taxes for the financial year ending March 31. The drop in bond prices pushed the benchmark yield to the highest in a month.

"Liquidity has tightened again and could remain tight as the system adjusts to advance tax outflows weighing on bonds", said Ashish Agrawal, a debt strategist at

Merrill Lynch & Co. in Hong Kong. "The overnight rates could be volatile as we approach the financial year-end.''

The yield on the benchmark 8.07 per cent bond due January 2017 rose by 6 basis points, or 0.06 percentage point, to 8.08 per cent at the close of trading at 5:30 pm in Mumbai, according to the central bank's trading system. The price fell by 0.40, or 40 paise per 100-rupee face amount, the biggest this month, to 99.95. Yields move inversely to prices.

Companies may have paid as much as Rs 400 crore ($9.1 billion) of advance taxes on March 15, according to bond trader surveyed by Bloomberg. The outflow and the resulting cash shortfall prompted the lenders to borrow a net Rs 34,950 crore from the central bank via repurchase auctions, the most since December 28, Bloomberg data shows.

The average volume of securities traded each day fell to Rs 2720 crore this month, from Rs 3580 crore in February, according to the Clearing Corp. of India Limited.

Bonds also declined on concerns that the central bank will increase its key interest rate next month after a government report last week showed that inflation accelerated more than expected.

The wholesale prices rose 6.46 percent in the week ended March 3 from 6.1 per cent in the prior week, faster than the 6.3 per cent gain that analysts had estimated in a Bloomberg News survey. The Reserve Bank of India has lifted the overnight lending rate eight times since October 2004. Policy makers are scheduled to meet next to review the borrowing costs on April 24.

``There's a good possibility they may increase the rate one more time next month when they meet,'' said K. Ramkumar, who manages the equivalent of $1.5 billion in Indian debt at SBI Funds Management Limited in Mumbai. ``As an investor, I'm staying away from bonds for now until volumes improve.The yield on securities due in two years or less may drop as much as 50 basis points after May as concerns about inflation and rates recede", Ramkumar said.

The spread between two-year and 10-year government bonds has narrowed to zero from 32 basis points at the beginning of the year.

The flattening yield curve signals that the central bank may announce more measures to curb inflation, while concerns about longer-term inflation are subdued, Ramkumar said.