SLR needs buoy bonds

MARKET ROUND-UP

The government bonds rose for the second week on speculation banks will purchase more debt to meet minimum holding needs as their deposits increase.

The yield on the benchmark 10-year notes fell to the lowest in more than a week, as banks bought debt to meet the statutory liquidity ratio (SLR).

Under that law, banks need to invest at least 25 per cent of their deposits in government debt or other low-risk securities approved by the central bank.

"Banks pushed their deposit mop-up towards the end of the last financial year'' meaning they now have to buy more debt, said K P Suresh Prabhu, chief of fixed-income at Mumbai-based HDFC Bank. "That has helped prices rise.''

The yield on the benchmark 8.07 per cent bond due January 2017 fell 4 basis points, or 0.04 percentage, to 8.06 per cent as of the 5:30 pm close in Mumbai, from a week before, according to the central bank's trading system. The price rose 0.22, or 22 paise to Rs 100.02.

Yields move inversely to prices.

The banks stepped up efforts to increase their deposits after the central bank drained funds from the financial system by increasing the amount of cash that lenders must set aside to cover deposits three times between December and March.

Total bank deposits rose Rs 4,85,000 crore ($115 billion), or 23 per cent, in the financial year ended March 31, compared with an 18.1 per cent gain in the previous 12 months.

Bonds pared gains after a government report today showed wholesale price inflation accelerated more than economists expected.

Ten-year yields rose after the ministry of commerce and industry said the inflation rate was 6.09 per cent in the week ended April 7, from 5.74 per cent the previous week. The rate stayed above the central bank's forecast range for the 18th straight week, as prices of fruits and farm products increased.

"I think the upward pressure on prices in the economy still exists,'' said S P Prabhu, chief of fixed income at IDBI Capital Market Services, a Mumbai-based primary dealer that underwrites government debt sales. "That may strengthen the case for the central bank to increase interest rates.''

Reserve Bank of India Governor Yaga Venugopal Reddy has increased the rate at which the central bank lends to banks twice this year by a quarter percentage each to curb inflation.

Inflation accelerated to the highest in more than two years in January due to rising credit growth.