10-yr bond decline continues

The country's 10-year bonds extended declines for a second day after the finance minister said manufacturing prices are rising and accelerating inflation will hurt companies.

Economic growth is poised to touch a record 9 per cent this financial year, boosting demand for loans and fueling inflation in Asia's fourth-biggest economy.

Yields on 10-year notes rose from near a one-month low on speculation the central bank will lift interest rates this month to curb rising prices.

"The authorities have been flagging concerns about inflation and it is likely that the central bank will once again raise interest rates,'' said Rajesh Babu, a bond trader at state-owned Andhra Bank in Mumbai.

The yield on the benchmark 8.07 per cent bond due January 2017 rose 3 basis points, or 0.03 percentage point, to 7.53 per cent at close of trading in Mumbai, according to the central bank's trading system.

The price fell 0.23, or 23 paise per 100-rupee face amount, to 103.78. Yields move inversely to prices. The inflation rate, as measured by wholesale prices, unexpectedly quickened to 5.48 per cent in the week ended December 23, the highest since October.

Even a rate of 4 per cent is unacceptable, Finance Minister Palaniappan Chidambaram said in New Delhi yesterday.

Reserve Bank of India Governor Yaga Venugopal Reddy and fellow policy makers will meet on January 31 to decide on interest rates after raising the central bank's overnight lending rate four times in 2006.

Bank Demand: The decline in bonds may be tempered by speculation lenders, the biggest buyers of debt, will increase their purchases as they seek to comply with a banking rule forcing them to hold at least 25 per cent of their deposits in government securities.

"This has been a big driving force for bonds in the last few months, keeping yields from rising much,'' said Sanjeet Singh, a trader at ICICI Securities, a Mumbai-based primary dealer that underwrites government debt sales.

``Demand will continue until there's a change in the rule.'' India may issue an ordinance allowing the central bank to set a lower limit on bond holdings until an amendment bill, which has been pending in the nation's parliament for over a year, becomes law, without saying where it got the information.

India plans to sell Rs 4000 crore ($897 million) of 8.33 per cent bonds maturing 2036 on January 12 as part of its borrowing plan for the current financial year.

It reduced the amount it had earlier planned to sell at the auction from Rs 9000 crore. The government sold Rs 3500 crore of treasury bills at a weekly auction today.