Bonds surge to 2-yr high on repo rate hike

MARKET ROUND-UP

Ten-year bonds gained the most in more than two years after the central bank raised the overnight lending rate to curb money supply, spurring optimism that inflation will be kept in check.

The yield on the benchmark 10-year bond fell to the lowest in three weeks, as Governor Yaga Venugopal Reddy increased the repurchase rate to 7.5 per cent, making funds more expensive for borrowers.

Wholesale price inflation accelerated to a two-year high earlier this month. Bonds also rallied after the reverse-repurchase rate and the cash-reserve ratio were left unchanged.

"The central bank is doing enough to make sure inflation is under control without giving up on the government's aim to achieve growth,'' said Krishnamurthy Harihar, treasurer at Development Credit Bank in Mumbai. "It is a fine balancing act to attack money supply with higher lending rates without touching anything else.''

The yield on the benchmark 8.07 per cent bond due January 2017 fell 17 basis points, or 0.17 per cent, to 7.73 per cent, according to the central bank's trading system. The price rose 1.16 per to Rs 102.30. Bond yields move inversely to prices.

"A determined and coordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion,'' the central bank said in its statement.

Wholesale price inflation quickened to 6.12 pe rcent in the week ended January 6, the most since December 2004, according to the ministry of commerce and industry.

The level exceeded the central bank's March 31, fiscal year-end forecast of 5-5.5 per cent for a third straight week. The central bank said that it will slow inflation to the desired range "at the earliest''.

In addition to raising interest rates, Reddy last year had also increased the amount of cash lenders must set aside to cover deposits by half a percentage, leaving banks with fewer funds to lend.

Near-record lending by banks has fuelled inflation as Asia's fourth-biggest economy expanded at an average 8.3 per cent in the past three financial years, the fastest pace since the country gained independence in 1947.