Bond rates down on fear of govt debt sales

Indian bonds declined on concern government debt sales will drain money from the banking system in the coming weeks, leaving lenders with less cash to buy debt.

Yields on 10-year debt rose from a three-week low as the federal government is scheduled to borrow Rs 90 billion rupees ($2 billion) as early as January 5, according to its bond auction calendar.

Bonds also fell on speculation the central bank will increase borrowing costs this month to curb inflation stoked by growing demand in the world's second-fastest growing economy.

"Forthcoming government bond auctions may put some pressure on liquidity," said NN Jayashankaran, director at CorpBank Securities Ltd, a primary dealer in Mumbai that underwrites government debt sales.

"The Reserve Bank is likely to increase interest rates at this month's policy review to cool inflationary expectations," he added.

The yield on the benchmark 8.07 percent note due January 2017 rose 1 basis point, or 0.01 percentage point, to 7.54 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The yield fell 9 basis points yesterday, the biggest one-day decline since Sept. 20, to a three-week low of 7.53 per cent.

The price fell 0.06, or 6 paise per 100-rupee face amount, to 103.71. Bond yields move inversely to prices.

India is scheduled to sell bonds worth Rs 140 billion this month. It plans to raise Rs 310 billion through bond auctions between October and March, as part of the Rs 1.52 billion it is seeking to borrow in the current fiscal year.

The Reserve Bank of India raised its overnight lending rate four times in 2006 to 7.25 per cent to restrain inflation. The bank is next due to review its policy on January 31.

The annual inflation rate accelerated to 5.43 per cent in the week ended December 16 from 5.32 per cent a week earlier, the Ministry of Commerce and Industry said on December 29.

The pace is approaching the upper end of a 5 per cent to 5.5 per cent range forecast by the central bank for this fiscal year. The economy grew 9.2 per cent in the quarter through September, beating the 8.9 percent gain in the previous quarter.

Bonds gained earlier after money market interest rates more than halved from a nine-year high reached on December 29, suggesting surplus cash at banks has increased.

"Overnight rates have moved lower and can stay around 8 per cent to 10 per cent for the rest of the week," which is good for bonds, said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, Mumbai.

Overnight money rates fell to 6.38 per cent from 10.5 per cent yesterday, according to data compiled by Bloomberg. The rate had climbed to 19 per cent last week after banks lifted reserves to 5.25 per cent of deposits from 5 per cent on December 23.

They must raise them again to 5.5 per cent from January 6. The two-step increase would effectively drain Rs 135 billion from the banking system, according to the central bank.