Bonds plunge on yield rise fears

MARKET ROUND-UP

Bonds declined, reversing earlier gains, on concern a drop in spare cash at banks will prompt investors to demand higher yields at the debt auction later this week.

"Cash position in the banking system isn't comforting and that will weigh against bonds,'' said Rajesh Babu, a trader at state-owned Andhra Bank in Mumbai. "The market undertone is weak and that will have a bearing on the debt sale.''

An increase in banks' borrowings from the Reserve Bank of India showed the supply of cash in the banking system has dropped. Banks borrowed an average Rs 12,600 crore a day from the central bank in the month through today, compared with Rs 5,600 crore in the previous month, according to central bank data.

The yield on the benchmark 8.07 per cent note due January 2017 was little changed at 7.75 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system. The price, which moves inversely to the yield, fell 0.02, or 2 paise a rupee to 102.15.

The government is scheduled to sell Rs 9,000 crore of securities on February 9 at its 19th debt auction in the fiscal year through March. It will auction Rs 6,000 crore of 7.37 per cent notes due 2014 and Rs 3,000 crore of 8.33 per cent bonds maturing in 2036.

Bonds gained earlier on optimism lenders will buy more debt to meet reserves as rising interest rates boost deposits in the banking system. Under India's banking law, banks must invest at least 25 per cent of their deposits in government debt or other low-risk securities approved by the central bank.

"Demand for securities from banks to meet statutory investment requirements will give support to bonds as bank deposits keep rising,'' said Vineet Malik, head of interest-rate trading at HSBC Holdings in Mumbai.

Bank deposits in India are growing faster as lenders offer higher rates in line with the increases in the central bank's benchmark rate. Deposits rose 23 per cent in the year ended January 19 to Rs 23.9 trillion ($542 billion), compared with a 17 per cent growth the previous year, according to the central bank.

ICICI Bank, India's biggest by market value, yesterday said it will pay 125 basis points more on its fixed deposits on maturity of five years on an amount of Rs 100,000 or less.

The revised rate will be 9.5 per cent, effective February 9.

The Reserve Bank of India raised its benchmark rate for the fifth time in a year to 7.5 per cent on January 31 to slow inflation stoked by the nation's economic growth, the second-fastest among major economies.