By Anil Varma, Bloomberg
Mumbai: Indian bonds fell after Reserve Bank of Indi a (RBI) deputy governor Rakesh Mohan said the monetary authority will “take all steps to manage liquidity,” spurring concerns the bank will increase debt sales to drain excess cash from lenders.
Benchmark 10-year yields rose on speculation that any increase in debt sales by the RBI will leave banks with less spare money to buy debt. The apex bank will sell bonds and treasury bills worth Rs4,500 crore ($1 billion) on 14 March under the so-called market stabilization plan to absorb excess cash from the banking system.
“We expect the bond market to be on a more cautious footing this week,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd in Mumbai. “There are fears liquidity could tighten this week on account of tax outflows. In addition, the RBI is removing excess liquidity from the system by selling stabilization bonds.”
The yield on the benchmark 8.07% note due January 2017 rose 4 basis points to 8.01% before noon in Mumbai, according to the RBI’s trading system. The price fell Re0.28, or 28 paise per Rs100 face amount, to Rs100.4.
“We’ll use all tools available to manage liquidity,” Mohan said at an investor conference on 14 March. “The focus will remain on liquidity management and we’ll take all measures... to maintain price stability and bring inflation down.”
The RBI sells debt securities every week under its stabilization plan to drain excess cash that may inflate prices of goods and financial assets. It stepped up such sales last week, after money supply growth in the country accelerated to 22%, the highest in a decade, in the two weeks ended 16 February.
Inflation has averaged 6.3% since 1 January, compared with 5.5% the previous quarter and 5.1% in the three months ended 30 September, government data show.
Bonds may pare losses on speculation policy measures taken by the apex bank and the government will slow inflation and ease pressure on interest rates to rise. India has announced fiscal and other measures to cap commodity price gains this year, in addition to monetary steps to moderate inflation.
“We’ve seen yields rise 300 basis points in the last 24 months or so, and this should kick in along with other measures to fight inflation,” said Amandeep Chopra, who helps manage $4.9 billion in debt at UTI Asset Management Co. in Mumbai. “That augurs well, because we can see rates stabilizing first, and then declining. I expect the RBI to raise interest rates once more, and that possibly could be the peak.”
The RBI in January increased its benchmark interest rate for the fifth time in a year to a four-year high of 7.5%. It has also raised the amount of money banks must keep as cash reserves to drain money from the banking system, making credit costlier.