Mumbai: The overnight interest rates in India fell to their lowest in more than 19 months on 12 April on ample cash, but federal bond yields rose after the central bank, the Reserve Bank of India, set a lower than-expected cut-off price at an auction.
The overnight cash rates fell to between 2% and 2.25%—a level not seen since September 2005—from between 3.50% and 3.75% on 11 April, as cash supplies were boosted by higher government spending and by coupon payments.
The rates had hit a 10-year high of 80% last month due to a cash squeeze.
Most banks had covered their reserve requirements, traders said, and with the central bank limiting the amount of funds it would accept via its daily market operations, the overnight rates are expected to fall even further.
However, the 10-year bond yield climbed to 8.07% from close level of 8.05% on 11 April.
“The sentiment was very positive in the morning, but the higher cut-off yield prompted investors to pare their positions,” a senior dealer with a private-sector bank said.
The government sold some Rs6,000 crore worth of 2015 bonds and some Rs4,000 crore worth of 2036 bonds on Thursday.
The cut-off price on the 2015 bonds corresponded to a yield 8.1609%, higher than the market expectations of 8.1111%.
At the 2036 bond auction, the yield worked out to 8.5752%, against expectations of 8.5389%.
Data showed on 12 April that industrial output rose 11% in February from a year earlier, a tad above market expectations and raising concerns that policy would be further tightened.
Traders anticipated that bond prices are likely to rebound as cash is expected to remain ample even after the bond auction payments and the first leg of increase in the cash reserve ratio on Saturday.
The traders also added that any announcement of market stabilization bonds to absorb excess cash on 13 April was likely to be offset by large inflows from coupon payments and redemptions next week.