Bonds drop on SLR move

Bonds fell, pushing yields near a four-month high after a government official said a decree to change the measure of debt banks must hold may be issued by the end of the month.

Ten-year bonds ended two days of gains on concern any cut in the amount of debt banks are required to buy will spur sales. The government on January 11 approved an order that will enable the central bank to set the minimum amount of debt lenders must own, replacing the present law forcing them to hold at least 25 per cent of deposits in securities.

The order needs the approval of the president to become effective.

"There's a lot of uncertainty about this rule and over when the central bank will actually lower the limit,'' said Vijay Sharma, a trader at PNB Gilts Ltd., a primary dealer that underwrites government debt sales in New Delhi. "The confusion is reflected in the way yields have moved.''

The yield on the benchmark 8.07 per cent bond due January 2017 rose 3 basis points, or 0.03 percentage point, to 7.79 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system.

The price fell 0.25, or 25 paise per Rs 100 face amount, to 101.90. Bond yields move inversely to prices.

A finance ministry official, who declined to be identified, today said the directive will get the president's approval by the end of the month or as late as February 3.

Bonds also declined on concern debt auctions before the central bank's decision on interest rates on January 31 will sap demand for the securities.

Central bank Governor Yaga Venugopal Reddy will probably raise the benchmark interest rate by a quarter percentage point this month after a report last week showed factory output in November expanded at the fastest pace in more than a decade, PNB Gilts' Sharma predicted.

The government sold Rs 20.9 billion ($473 million) of treasury bills today. It will auction Rs 50 billion of bonds due in 15 to 20 years by January 25.

"The next trigger the market is looking forward to is the auction,'' said Sharma.

"Unless the government decides to cancel the bond auction, we don't see yields falling much from these levels.''

At a previous auction on Jan. 12, the government reduced the amount on sale by more than a half "on review of the current borrowing requirements,'' without providing details.

Moody's Investors Service yesterday kept its local-currency debt rating for India at below investment grade, citing heavy public debt.

Moody's has a stable outlook on India's local-currency debt, which it has rated Ba2 since June 1998, two levels below investment grade.

It rates India's foreign-currency debt an investment-grade Baa3, because of its "healthy external position'' and the government's determination to avoid defaults.