RBI's anti-inflation steps lift bonds

MARKET ROUND-UP

Indian bonds gained on speculation policy measures taken by the central bank and the government will slow inflation and ease pressure on interest rates to rise.

Benchmark 10-year yields, which move opposite to prices, declined as any drop in the inflation rate will help the central bank to consider suspending a 2 1/2 year cycle of interest-rate increases.

India has announced fiscal and other measures to cap commodity price gains this year, in addition to monetary steps taken by the central bank to moderate inflation that accelerated last month to the fastest in more than two years.

"We've seen yields rise 300 basis points in the last 24 months or so, and this should kick in along with other measures to fight inflation,'' said Amandeep Chopra, who helps manage $4.9 billion in debt at UTI Asset Management Co. in Mumbai.

"That augurs well, because we can see rates stabilizing first, and then declining. I expect the central bank to raise interest rates once more, and that possibly could be the peak.''

The yield on the benchmark 8.07 per cent note due January 2017 fell 1 basis point, or 0.01 percentage point, to 7.96 per cent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. It climbed to 8.01 per cent earlier in the day. The price rose 4 paise per Rs 100 face amount, to 100.72.

The Reserve Bank of India in January increased its benchmark lending rate for the fifth time in a year to a four-year high of 7.5 per cent. The bank has also raised the amount of cash banks must keep as reserves to drain money from the banking system, making credit costlier.

The government has cut auto-fuel prices and reduced tariffs on cooking oils, metals, cement and chemicals in the past two months.

The world's second largest producer of wheat and rice banned futures trading in the two commodities last month to limit price gains. Last week, it asked cement producers not to raise prices for a year.

Inflation has averaged 6.3 per cent since January 1, compared with 5.5 per cent the previous quarter and 5.1 per cent in the three months ended September 30, government data show.

Bonds fell earlier after central bank Deputy Governor Rakesh Mohan said the monetary authority will take all steps to manage liquidity, stoking concern it will boost debt sales to drain lenders' surplus cash.

"We'll use all tools available to manage liquidity,'' Mohan said, speaking at an investor conference today. "The focus will remain on liquidity management and we'll take all measures. We'll take all possible monetary actions to maintain price stability and bring inflation down.''

The central bank sold bonds and treasury bills worth as much as 45 billion rupees ($1 billion) today under the so-called market stabilization plan to absorb excess money from the banking system.

"We expect the bond market to be on a more cautious footing this week,'' said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

"There are fears that liquidity could tighten this week on account of tax outflows. In addition, the Reserve Bank is removing excess liquidity from the system by selling stabilisation bonds.''

The Reserve Bank sells debt securities every week under its stabilization plan to drain excess cash that may inflate prices of goods and financial assets.

The bank stepped up such sales from last week, after money supply growth in the country accelerated to 22 per cent, the highest in at least a decade, in the two weeks ended February 16. Faster growth in money supply stokes price gains.