Lower call rates boost bonds

Bonds rose for a third day, as a drop in the overnight lending rate made it cheaper to purchase debt with borrowed funds.

The benchmark 10-year bond yields, which move opposite to the price, declined after the rate that banks charge each other for loans fell to 7.85 per cent from a one-month high of 8.05 per cent, according to data compiled by Bloomberg.

Yields slipped below 8 per cent for the first time in a week after reaching a six-month high of 8.09 per cent on February 14.

"There are no new negatives for bonds,'' said Anoop Verma, a bond trader at Development Credit Bank in Mumbai. "There isn't much pressure on cash supply today.''

The yield on the benchmark 8.07 per cent note due January 2017 fell 1 basis point, or 0.01 percentage, to 8 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The price rose 0.08, or 8 paise to Rs 100.45.

Borrowing costs fell today on speculation dollar purchases by the central bank will boost the supply of rupees in the banking system, said Sanjeet Singh, a bond trader at ICICI Securities, a Mumbai-based primary dealer that is obliged to participate in government debt auctions.

Money rates reached the highest in a month yesterday after banks on February 17 increased the cash they must set aside as reserves to 5.75 per cent of deposits from 5.5 per cent to meet new regulations introduced by the Reserve Bank of India. Lenders must raise reserves by another quarter-percentage to 6 per cent on March 3.

Bonds pared gains on speculation the drop in the overnight lending rate will be short-lived as money flows out of the market before the March 15 deadline for corporate tax payments.

Indian banks, the biggest buyers of debt, typically borrow to fund part of their debt portfolios.

"Fund outflows will put some pressure on the bond market in March,'' said P Venkatesh, chief fixed-income trader at state-owned Corporation Bank in Mumbai, who forecasts the 10-year yield will rise to 8.05 per cent.

Bonds also rose on speculation the government will reduce or cancel Rs 8,000 crore of borrowings scheduled for as early as March 2, as tax revenue increased more than it forecast.