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Government spending eases crunch; bonds rise

Government spending eases crunch; bonds rise
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First Published: Fri, Mar 30 2007. 12 23 AM IST
Updated: Fri, Mar 30 2007. 12 23 AM IST
India’s two-year bonds gained for the first time in four days on expectations that increased spending by the government will return cash to the banking system and reduce the cost of borrowing.
The rate at which banks lend to each other overnight fell as low as 8%, the least in more than a week, according to data compiled by Bloomberg. The cost of money had surged to the highest in almost a decade last week. Bonds also gained on speculation lenders are stocking up securities to meet reserve requirements before the fiscal year ends on Friday.
“There’s been some easing of liquidity after some inflow of money mainly on account of government spending,” said P. Venkatesh, chief bond trader at state-owned Corporation Bank in Mumbai. “Bonds are also getting support from interest from banks as they balance their books before the year end.”
The yield on the most-frequently traded 6.65% note due April 2009 fell 10 basis points, or 0.1% point, to 7.99%, according to the central bank’s trading system. The price of the security rose 0.18, or 18 paise per Rs100 face amount, to 97.55.
The central bank on Wednesday sold $1.4 billion (Rs6,020 crore) of the two-year securities at a cut-off yield of 8.15%. Indian lenders, by law, must hold 25% of their deposits in government debt or other low-risk securities approved by the central bank.
Funds with banks dwindled after companies paid as much as Rs40,000 crore in advance taxes on 15 March, pushing up the money market rate to as high as 70% the following week. The government is now spending some of that money.
Inflation Concerns
The yield on the benchmark 8.07% bond due January 2017 fell 3 basis points to 7.96%. The spread between the two-year note and the 10-year security narrowed to 3 basis points, with the shorter-maturity bond yielding more, Bloomberg data show. The debt due 2009 on Wednesday yielded 10 basis points more than the benchmark bond.
Gains in bonds may be tempered by speculation the central bank will raise the benchmark interest rate again on 24 April to curb inflation, said M.A. Sardesai, treasurer at state-owned Bank of Maharashtra in Mumbai. Inflation stayed near the highest in more than two years in the week ended 10 March.
Finance minister Palaniappan Chidambaram told CNBC channel yesterday in Hong Kong that “further monetary tightening is likely given high inflation.”
Reserve Bank of India Governor Y.V. Reddy has increased the overnight lending rate eight times since October 2004. He also raised the amount of cash lenders must set aside to curb excess cash in the banking system.
“Inflation seems to be the central bank’s primary concern,” Sardesai said. “I expect them to raise interest rates next month.”
Wholesale price inflation may have accelerated to 6.5% in the week ended 17 March, according to a Bloomberg survey of economists before Friday’s report, from 6.46% in the prior week. Crude oil prices on Wednesday surged to a six- month high, adding to concern inflation won’t slow.
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First Published: Fri, Mar 30 2007. 12 23 AM IST
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