India’s government bonds fell as lenders set aside more cash to cover deposits after the central bank raised the limit last week to curb inflation.
The cost of overnight funds in the call money market rose to the highest in almost a month, making debt purchases with borrowed funds more expensive. Ten-year bond yields are near the highest in six months after the Reserve Bank of India last week boosted the reserve ratio by half a percentage point in two stages, the first of which took effect 17 February.
“We’re seeing hardening interest rates as inflation poses a big problem for the central bank,” said M. Natarajan, chief trader at IndusInd Bank Ltd. in Mumbai. “It seems whenever liquidity eases, the central bank will step in and suck it out.”
The yield on the benchmark 8.07 % bond due 2017 rose 2 basis points, or 0.02 percentage point, to 8.04 % as of 10:40 a.m. in Mumbai, according to the central bank’s trading system. The price of the security fell 0.15, or 15 paise per 100- rupee face amount, to 100.20. Bond yields move inversely to prices.
Wholesale price inflation accelerated to 6.73 % in the week ended 3 February, the fastest since December 2004, as the government estimates Asia’s fourth-biggest economy is poised to expand 9.2 % in the financial year ending 31 March, beating last year’s record 9 %.
Central bank Governor Yaga Venugopal Reddy on 31 January, while raising the overnight lending rate for the fifth time in a year, said “a determined effort to contain inflation is not only an economic necessity but also a moral compulsion.”
In less than two weeks he also increased the cash reserve ratio to 6 % to mop up excess funds generated by the central bank buying dollars as capital flows increased. The nation’s foreign-exchange reserves rose more than $5 billion in the week ended 9 February, the most since at least 1992, according to JPMorgan Chase & Co.
The accumulation of reserves suggests the central bank is stepping up dollar purchases to curb gains in the rupee.
“The interplay between the currency, equity and bond markets are more pronounced now,” said Natarajan.