Auction woes hit gilts

MARKET ROUND-UP

The government securities fell the most in a week after RBI Deputy Governor Rakesh Mohan said the bank would act swiftly to curb inflation, signaling it may increase debt sales.

The benchmark 10-year note dropped the most since March 8 on speculation the Reserve Bank of India would issue more securities to drain surplus cash from the banking system under its market stabilisation scheme.

Bonds may also decline on concern banks will have less spare cash to buy the debt as companies pay their quarterly tax before the deadline today.

"After Rakesh Mohan's latest comments, we expect the RBI to step up stabilisation bond sales," said Mahendra Jajoo, who manages the equivalent of $1.2 billion of Indian debt at ABN Amro Asset Management in Mumbai. "In addition, we have tax outflows coming up this week. This doesn't give us fund managers a very good feeling."

The yield on the benchmark 8.07 per cent note due January 2017 rose 3 basis points, or 0.03 percentage points, to 7.99 per cent at the close, according to the central bank's trading system.

The price fell 0.18, or 18 paise per Rs 100 face amount, to Rs 100.54. The fall was the biggest since March 8. Yields move inversely to prices.

"We'll use all tools available to manage liquidity," Mohan said at an investor conference yesterday. "The focus will remain on liquidity management and we'll take all measures. We'll take all possible monetary actions to maintain price stability and bring inflation down."

Bonds may pare losses on speculation lenders, the biggest buyers of government debt, will buy more securities.

Under a law known as the statutory liquidity ratio, lenders are required to invest at least 25 percent of their deposits in Indian government debt or other low-risk securities approved by the central bank.

"Banks' demand for debt to meet the statutory liquidity ratio remains an important theme in the bond market,'' said Sanjeet Singh, a bond trader at ICICI Securities, a primary dealer that underwrites government debt sales in Mumbai. "Bonds will continue to get support from banks' demand."

Domestic bank's deposits rose by 24.5 per cent, or Rs 4.9 trillion to Rs 24.7 trillion in the two weeks ended February 23, the central bank said on March 9.