Bonds drop on auction status quo

Bonds fell, pushing yields to the highest in more than four months, after the government said it will go ahead with a debt sale this week, quashing speculation the auction will be scrapped.

The nation will sell Rs 50 billion ($1.1 billion) of bonds due in 2021 on January 25 as part of its annual borrowing program. Rising tax receipts and the government's decision to reduce its borrowing by more than half at its previous auction on Jan. 12 fueled speculation it would refrain from selling debt this week.

"The market was assigning a small probability to the cancellation of this auction,'' said Ashish Agrawal, a strategist at Merrill Lynch & Co. based in Hong Kong. "The supply is a negative given little signs of demand getting more aggressive.''

The yield on the benchmark 8.07 percent bond due January 2017 rose 11 basis points, or 0.11 percentage point, to 7.90 per cent at the 5:30 p.m. close of trading in Mumbai, according to the central bank's trading system. The yield, which moves inversely to prices, is the highest since September 1. The price fell 0.82, or 82 paise per Rs 100 face amount, to Rs 101.08.

Direct tax revenue from companies and individuals rose 42 per cent in the nine months ended December, the government said January 10, boosted by increasing earnings and faster economic growth. Factory output expanded at the fastest pace in more than a decade in November, another report showed on January 12.

Bonds also fell on concern the central bank will raise interest rates when policy makers meet on January 31 after a government report last week showed wholesale prices rose at the fastest pace in two years.

Inflation, measured by wholesale prices, quickened to 6.12 per cent in the week ended January 6, from 5.58 per cent the previous week, the ministry of commerce and industry said January 19.