By Sam Nagarajan, Bloomberg
Mumbai: India’s 10-year bonds headed for the third week of losses after the cost of borrowing money overnight rose to the highest in more than two months on concern tax payments will reduce funds in coming days.
Companies may have paid as much as Rs400 billion ($9 billion) in advance taxes due yesterday, according to estimates by bond traders. The overnight call-money rate jumped as high as 9.75%, the most since 2 January, from 5.38% yesterday, making it more expensive to buy debt with borrowed funds.
“The tax outflow will make money dearer for the next few days and bonds may remain under pressure,” said S.P. Prabhu, chief trader at IDBI Capital Market Services Ltd., a Mumbai-based primary dealer that underwrites government debt sales. “The overnight rate may rise and stay higher till the government decides to spend money.”
The yield on the benchmark 8.07% bond due January 2017 rose 2 basis points, or 0.02 percentage point, to 8.01%, according to the central bank’s trading system. The price of the security fell 0.16, or 16 paise per Rs100 face amount, to 100.38.
Bonds also declined on concern the central bank will sell more debt to mop up excess cash from the banking system to curb inflation, after Deputy Governor Rakesh Mohan this week said the authorities will take “all possible measures” to manage liquidity.
Mohan also told reporters in Mumbai on 14 March that the central bank will act “swiftly” in response to any situation that threatens to accelerate inflation.
A government report today may show wholesale prices rose 6.3% in the week ended 3 March, compared with a gain of 6.1% in the prior week. The Ministry of Commerce & Industry will release the data at noon.
“There’s a view that the central bank will increase interest rates again in April, which may pressure yields upwards,” said P. Venkatesh, chief bond trader at state-owned Corporation Bank in Mumbai. “Cash surplus in the banking system may not remain because of the weekly outflow from additional sales of securities.”
The central bank last week resumed the sale of the so-called market stabilization bonds to absorb surplus funds, after a gap of almost two years. It sells 25 billion rupees of bills to suck out money every week.
The Reserve Bank of India, which meets on April 24 to decide on interest rates, has raised the overnight lending rate eight times since October 2004. It also raised the amount of cash lenders must set aside to cover deposits, draining as much as 275 billion rupees ($6 billion) over four months.