Tax outgo fears dent bonds

MARKET ROUND-UP

The bonds fell on speculation corporate tax payments will drain cash from the banking system in the coming weeks, leaving lenders with less spare funds to buy debt.

Ten-year yields, which move opposite to prices, rose the most in more than a week, as companies prepare to pay their fourth-quarterly instalment of taxes for the current financial year by March 15.

Firms may pay as much as Rs 40,000 crore ($9 billion) in tax this month, compared with the Rs 28,000 crore they are estimated to have paid in December, according to a Bloomberg News survey.

"The market faces a liquidity crunch, with advance tax payments due to flow out of the system,'' said Navneet Munot, who helps manage the equivalent of $4.1 billion in Indian stocks and bonds at Birla Sunlife Asset Management Co in Mumbai.

"We also have a hawkish central bank and a rising inflation rate. There may be room for a marginal increase in bond yields.''

The yield on the benchmark 8.07 per cent note due January 2017 rose 5 basis points, or 0.05 percentage, to 8 per cent as of the 5:30 pm close in Mumbai, according to the central bank's trading system.

This is the biggest increase since February 28. The price fell 0.34, or 34 paise to Rs 100.48. India's annual inflation has averaged 6.3 per cent this year, above the central bank's target range of 5 per cent to 5.5 per cent for the financial year through March.

The rate averaged 4.8 per cent in 2006. Inflation has accelerated as the nation's sustained economic growth stoked prices of manufactured and farm products. The Reserve Bank of India on January 31 raised its benchmark interest rate for the fifth time in a year to a four-year high of 7.5 per cent to slow inflation.

The bank will next review interest rates in April.

Bonds gained earlier on speculation a limit placed this week on subscriptions to the central bank's daily reverse repurchase auctions spurred lenders to invest more of their spare funds in debt.

The central bank capped with effect from March 5 the amount that banks can invest each day in its auctions at one-eighth of the average amount they spent in a day at such sales the previous week.

The limit has spurred banks with spare cash to invest more in the bond and money markets, said M A Sardesai, general manager of treasury at state-owned Bank of Maharashtra.