Mumbai: India’s 10-year bonds gained for the third time in four days as rising surplus cash at banks stoked demand for debt.
Benchmark yields fell to a two-week low as overnight borrowing costs stayed near the cheapest in 15 months, indicating funds in the financial system have increased. A surge in subscriptions at the central bank’s daily money auctions also showed lenders have more spare money. Banks are India’s biggest bond buyers, holding more than 70% of outstanding government debt.
“This is a liquidity-driven rally,” said Srinivasa Raghavan, head of treasury at IDBI Gilts Ltd. “Banks accumulated big cash surpluses around the 31 March fiscal year-end. Some of it is getting invested in bonds.”
Inconsistent: The rupee weakened for the first time in five days as a slide in Asian stocks fuelled concern that recession will damp risk appetite. Indranil Mukherjee / AFP
Meanwhile, the rupee weakened for the first time in five days as a slide in Asian stocks fuelled concern the global recession will damp risk appetite.
The yield on the 6.05% note due February 2019 fell 14 basis points to 6.86% at close, from 7% on 6 April, according to the Reserve Bank of India’s (RBI) trading system. The price rose 96 paise per Rs100 face amount to 94.26. One basis point is one-hundredth of a percentage point.
Local financial markets were shut on Tuesday for a holiday.
The rate at which banks in Mumbai lend to each other overnight was at 3.55%, compared with 5% on 31 March. The rate dropped to 3% on 4 April, the lowest since January 2008, according to data compiled by Bloomberg.
Bids at RBI’s daily reverse-repurchase auctions totalled an all-time high Rs1.2 trillion on 6 April, up from a net Rs28,900 crore a week earlier.
Bond gains were limited by concern the government will sell more debt as it increases spending to shield the economy from a global recession. The government plans to sell a record Rs2.41 trillion of bonds in the six months that started 1 April.
The government shouldn’t aim to trim its budget deficit this year and instead step up public spending as consumer and investment demand slows amid the global financial crisis, Planning Commission deputy chairman Montek Singh Ahluwalia said in New Delhi on Tuesday.
The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, declined. The rate, a fixed payment made to receive floating rates, fell to 5.53% from 5.67% on 6 April.
The rupee slid 0.3% to 50.195 per dollar at close from 6 April. It earlier tumbled 1.2% to 50.665.
The currency retreated from the highest level since 25 February on speculation funds sought safety in dollars after a four-week rally in world equities stalled. Offshore rupee forward contracts dropped by the most in two weeks as traders increased bets for further losses in the currency.
“The broad undertone isn’t in favour of the rupee because world equity markets aren’t showing a consistent rising trend,” said Viswanathan Kumar, chief currency trader at State Bank of Travancore in Mumbai.
Anoop Agrawal contributed to this story.