India’s 10-year bonds rose the most in two weeks on speculation of increased demand at scheduled debt sales this week after overnight borrowing costs fell to a three-week low.
The benchmark bond advanced a second day as the cost of overnight funds dropped to as low as 5.38% on 8 May 2007, the least since 13 April, according to data compiled by Bloomberg.
Salaries paid to government employees at the beginning of the month returned funds to the banking system, lowering the overnight cost of money and making it cheaper to buy debt with borrowed funds.
“Liquidity seems much easier now and we are seeing some demand for bonds,” said P. Venkatesh, chief bond trader at the state-owned Corporation Bank in Mumbai. “Government spending is keeping overnight money cheaper and this may lend support at the auction.”
The yield on the benchmark 8.07% bond due January 2017 fell four basis points, or 0.04 percentage point, to 8.10% at the 5:30pm close of trading in Mumbai, according to the central bank’s trading system. The price of the security rose 0.295%, or 30p per 100-rupee face amount, to 99.78. Prices and yields of bonds move in an inverse ratio; that is, when prices rise, yields drop, and vice versa.
The country’s central bank, the Reserve Bank of India, will sell Rs2,000 crore of bonds on 10 May to drain excess cash from the banking system, while the Centre plans to sell Rs10,000 crore of debt on 11 May as part of its borrowing programme.
Funds in the banking system also rose after overseas investors bought $1.75 billion (Rs7,175 crore) of Indian shares and bonds in April, about 21 times their purchases in March, according to data provided by the market regulator, the Securities and Exchange Board of India.
Finance minister P. Chidambaram told lawmakers that measures taken by the central bank and the government will help moderate inflation and also said an improvement in the supply of grains is needed to narrow the gap between supply and demand.
Wholesale price inflation in the week ended 21 April slowed to 5.77%, near the lowest since 16 December, a government report showed last week.