10-year bonds rise for third day after crude oil falls

The 10-year bonds rose for a third day as a decline in oil prices stoked speculation inflation will slow. Bond yields fell to the lowest in two weeks after crude prices in New York slipped below $70 per barrel yesterday for the first time since June.

India meets three-quarters of its energy requirements through shipments from abroad. Inflation slowed to 4.05 per cent in the first week of this month from a two-year high of 6.69 per cent in January.

"Bonds have good support today because inflation is expected to decline as oil eases,'' said Rajesh Babu, a fixed- income trader with state-owned Andhra Bank Ltd. in Mumbai.

"The government report on Friday may show inflation fell below 4 per cent after a long time.''The yield on the benchmark 7.49 per cent note due April 2017 fell 5 basis points, or 0.05 percentage point, to 7.91 per cent at the 5:30 pm close in Mumbai, according to the central bank's trading system.

The price, which moves inversely to the yield, rose 0.31, or 31 paise per Rs 100 face value, to 97.20. Crude oil has fallen 8.8 per cent since a record high of $78.77 a barrel on August 1. India's oil imports rose 7 per cent in May from the previous month to $4.74 billion, according to the latest government data.

The central bank aims to cap inflation at 5 per cent this fiscal year, while Finance Minister Palaniappan Chidambaram wants to keep it as low as 4 per cent.

The rate of weekly price gains last fell below 4 percent in April 2006. Spare CashBonds also gained as spare cash in the banking system stoked demand.

An increase in lending to the central bank indicated there was more spare cash. Banks lent Rs 13,900 crore ($3.4 billion) via the Reserve Bank of India's reverse repurchase auction today, compared with Rs 10,200 crore yesterday.

"The sentiment in the government bond market is expected to remain largely positive due to the comfortable liquidity in the banking system,'' Namrata Padhye, a fixed-income strategist at IDBI Gilts, a Mumbai-based primary dealer that underwrites government debt, said in a research note.