The bonds rose, driving yields to the lowest level in six weeks, as the central bank said it would repurchase Rs 48,000 crore ($10.6 billion) of debt over four weeks to boost cash at banks.
The Reserve Bank of India (RBI), which left borrowing costs unchanged at a policy review on Thursday, said it would hold the first auction to buy back notes next week.
“Investors are buying bonds now because of the announcement on buybacks,” said Debendra Kumar Dash, a fixed- income trader at Development Credit Bank Ltd in Mumbai. “Bond yields will fall further as rates have been kept steady in the review.”
The yield on the 7.80 per cent note due May 2020 fell 12 basis points to 7.95 per cent as of the 5 pm close in Mumbai, according to the central bank’s trading system. The price rose 0.80, or 80 paise per Rs 100 face amount, to Rs 99.03. The yield has decreased 13 basis points this week.
India’s financial markets will be shut tomorrow for a local holiday.
The central bank cut the statutory liquidity ratio, or the proportion of deposits lenders need to invest in government bonds, to 24 per cent from 25 per cent. The moves takes effect on December 18.
“The reduction in the statutory liquidity ratio is negative for bonds as it may reduce demand,” Gaurav Kapur, senior India economist at Royal Bank of Scotland NV, said in a phone interview from Chennai. “But the cut will help improve liquidity, and may soften short-term rates.”
The cost of one-year interest-rate swaps, the fixed payment made to receive a floating rate, dropped eight basis points to 6.84 per cent.
Policy makers have increased borrowing costs this year by 150 basis points, the most of any monetary authority in Asia, to curb inflation. The repurchase rate, the rate at which lenders borrow from the central bank is 6.25 per cent. The reverse repurchase rate is 5.25 per cent.
The cost of one-year interest-rate swaps, the fixed payment made to receive a floating rate, dropped 11 basis points to 6.81 per cent.
Rupee snaps 2-week gain
The rupee completed a weekly loss on concern Europe’s debt crisis will worsen, prompting investors to favor the relative safety of the dollar.
The rupee ended two weeks of gains as the central bank kept borrowing costs unchanged at its policy review on Thursday. Moody’s Investors Service said yesterday it may lower Spain’s debt rating, less than three months after the previous cut.
“Global risk aversion continues to be the main negative factor for the rupee,” said Sudarshan Bhatt, Mumbai-based chief currency trader at Corporation Bank. “Expectations of stronger dollar demand from importers may also pressure the rupee lower in the short term.”
The rupee weakened 0.7 per cent during the week to 45.3550 per dollar as of the 5 pm close in Mumbai, according to data compiled by Bloomberg. India’s financial markets are closed tomorrow for a holiday.
Reserve Bank of India Governor Duvvuri Subbarao left the repurchase rate at 6.25 per cent and the reverse repurchase rate at 5.25 per cent, the bank said in Mumbai. It raised rates by 150 basis points in six moves this year, the most by any central bank in Asia. The announcement matched the forecasts of all 23 economists in a Bloomberg News survey, with 11 anticipating a rise at the Jan. 25 policy meeting.
Offshore forwards indicate the rupee will trade at 46.08 in three months, compared with expectations of 46.19 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
Call rate ends up
The interbank call money rate for four-day borrowings ended firm on Thursday as demand for funds was strong and liquidity continued to remain tight on account of reporting day, dealers said.
The four-day call rate ended at 6.75-6.80 per cent, compared with 6.70-6.75 per cent for one-day loans Wednesday. CBLOs ended at a weighted average rate of 6.15 per cent against 6.26 per cent in the previous session.
Also, payments towards the third instalment of corporate advance taxes, estimated at Rs 50,000 crore, supported the call rate.
But, the call rate is seen easing going ahead as the Reserve Bank of India’s (RBI) liquidity easing steps announced on Thursday may provide some comfort to the system.
The RBI, in its mid-quarter monetary policy review, announced a Rs 48,000 crore bond purchase programme spread out over the next one month and a cut in banks’ Statutory Liquidity Ratio by 100 bps to 24 per cent.
