Falling call rates spur bonds

MARKET ROUND-UP

The 10-year bonds advanced during the week, ending three weeks of losses, on speculation that a drop in money market interest rates will prompt banks to buy debt with borrowed funds.

The rate that banks charge each other for overnight loans, which climbed to a nine-year high on March 21, declined for the second day on optimism that increased spending by the government will boost the supply of funds in the banking system. Lower interest rates in the money market make it cheaper for banks to borrow to buy government debt.

"Bond market sentiment has turned positive in the past couple of days, mainly due to an improvement in banking system liquidity,'' said Srinivasan Varadarajan, treasurer at JPMorgan Chase & Co. in Mumbai. "It looks like money is coming into the system.''

The yield on the benchmark 8.07 per cent note due January 2017 fell by 7 basis points, or 0.07 percentage point this week to 7.95 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, rose by 0.47, or 47 paise per 100 rupee face amount, to 100.82.

Money market rates fell on speculation that government spending will rise as ministries seek to meet expenditure targets for the fiscal year ending March 31, boosting the amount of cash in the banking system. The government estimates that its expenditure during this fiscal year will increase by a quarter to 992 billion rupees ($22.7 billion) as it spends more on modernizing the nation's transportation and communication systems.

The rate on overnight borrowing fell to 9.5 per cent today, from 17.5 per cent yesterday, according to data compiled by Bloomberg. The rate rose as high as 67.5 per cent on March 21.

Bonds pared gains today on concerns that a rally in the oil prices will stoke inflation in India, which imports three-quarters of its crude requirements.

"Oil prices have hardened and that's a negative for bonds,'' said K.P. Suresh Prabhu, chief bond trader at HDFC Bank in Mumbai.

Crude oil rose for the fourth day in New York on speculations that stronger demand will push US gasoline consumption to a record this summer. Oil for May delivery has gained by 7.6 per cent this week.

A government report today showed that consumer prices rose by 6.46 per cent in the week ended March 10, holding near a two-year high.

The central bank is targeting inflation to be in a range between 5 per cent and 5.5 per cent.

The Reserve Bank of India raised its benchmark lending rate for the fifth time in a year to a four-year high of 7.5 per cent on Jan. 31. Policy makers are set to meet on April 24 to review the rates.