By Anil Varma, Bloomberg
Indian bonds headed for a weekly drop, paring earlier gains today, on concern corporate tax payments will drain money at banks this month, leaving lenders with less spare funds to invest in debt.
Benchmark 10-year bonds turned lower on concern companies’ tax payments will increase as India’s sustained economic growth boosts corporate earnings. Companies may pay as much as Rs400 billion ($9 billion) in quarterly tax by 15 March, compared with the Rs280 billion they are estimated to have paid in December, according to a Bloomberg News survey.
“Cash surpluses in the banking system could be strained in March because of the advance tax outflow,” said Harish Menon, an economist at ING Vysya Bank Ltd. in Mumbai. “We expect some hardening of yields this month.”
The yield on the benchmark rose by 8.07 % note due January 2017 rose 2 basis points, or 0.02 percentage point, to 7.95 % this week, according to the central bank’s trading system. The price fell by 0.14, or 14 paise per Rs100 face amount, to 100.80.
The yield spreads between bonds in various maturities increased. The yield spread between the 10-year bond and the 11.5 % note due May 2008 widened by 2 basis points to 36 basis points. The spread between the one-year security and the 8.33 % bond due June 2036 increased by 1 basis point to 59 basis points.
The yield on the benchmark 10-year bond may rise as high as 8.10 % this month, Menon said.
Outflow of corporate taxes typically boost overnight borrowing costs in the money market, deterring banks from buying debt with borrowed cash or spurring them to sell bonds to raise money. Overnight rates averaged 8.5 % in December, when companies last paid taxes, compared with 6.6 % in November.
Reliance Industries and Oil and Natural Gas Corp. led 20 of the 30 companies on Sensex, which reported higher-than-forecast earnings in the quarter through December. The government has forecast the economy to grow 9.2 % in the year through March, the second-fastest among the world’s major economies.
Bonds gained earlier after a local newspaper today reported inflation is slowing more than forecast by analysts.
“Bonds have risen thanks to a newspaper report saying the inflation rate dropped to the lowest in more than a month,” said Anoop Verma, a bond trader at Development Credit Bank Ltd. based in Mumbai.
Wholesale prices rose 6.05 % in the week ended 17 February, down from 6.63 % in the previous week. Inflation was forecast to be 6.25 %.
Government data confirmed the newspaper report. India’s inflation slowed for a second week as cuts in fuel prices and import tariffs made farm and manufactured products cheaper.
The cost of India’s interest-rate swaps, derivative contracts used to guard against the risk of an increase in rupee- based rates, was little changed. The five-year swap rate was unchanged at 7.89 %.