Ten-year bond yields fall to five-month low

MONEY MARKET ROUND-UP

Ten-year bonds rose for the second day, sending yields to the lowest in more than five months, on speculation increased spare cash in the banking system will boost demand for debt.

Yields fell to near the lowest since February 12 as a drop in interbank lending rates and rising bids by banks to lend to the central bank suggested surplus cash has increased. Bonds also gained on optimism slowing inflation and loan growth will allow the central bank to stop raising interest rates.

"The outlook is positive for bonds, there's a lot of surplus money in the market,'' said Mahendra Jajoo, who manages the equivalent of $2 billion in Indian debt at ABN Amro Asset Management Co. in Mumbai.

The yield on the benchmark 7.49 percent note due April 2017 fell 6 basis points, or 0.06 percentage point, to 7.85 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. This is the biggest drop since July 4. The price rose 0.41, or 41 paise per Rs 100 face value, to Rs 97.59.

The rate banks charge each other for overnight loans averaged 0.55 percent this month, compared with 2.4 percent in June, according to data compiled by Bloomberg. Banks' bids at the Reserve Bank of India's daily reverse repurchase auctions rose to Rs 985 billion ($24.4 billion) yesterday, from Rs 863 billion a week earlier, according to central bank data.

Bonds also gained on speculation the central bank will refrain from raising benchmark interest rates at a policy meeting this month.

Slowing Inflation
"The Reserve Bank is likely to maintain a passive monetary stance as inflation slows,'' ABN's Jajoo said. ``Central banks globally appear to be adopting a passive policy stance.''

Inflation and credit growth have slowed after the Reserve Bank of India increased its overnight lending rate to a five- year high of 7.75 per cent on March 30. The central bank is due to review interest rates at its next policy meeting on July 31.

The rate of inflation stayed below the Reserve Bank's target of 5 per cent in the six weeks through June 30, according to the government. Bank loans grew 23.4 per cent in the year through June 29, compared with 33.1 per cent in the previous year, the central bank said this month.