Anil Varma, Bloomberg
Mumbai: India’s 10-year bonds gained the most in more than two months, the biggest fluctuation in any government debt market today, on optimism a drop in money market rates is tempting banks to increase holdings of the securities.
Benchmark bonds also rallied after yields last week climbed to the highest in almost eight months, making them attractive to banks which are required by law to maintain debt holdings at a minimum of 25% of deposits. Higher rates offered by lenders are boosting deposits after the central bank last month told them to set aside more cash as reserves to curb lending.
“We have seen an increase in buying by banks, particularly with yields looking attractive,” said R.V.S. Sridhar, vice president of treasury at UTI Bank Ltd based in Mumbai. “We haven’t seen such a jump in yields in a while and investors are taking advantage of that. The decline in money market rates is also helping.”
The yield on the benchmark 8.07% bond due January 2017 fell 11 basis points, or 0.11 percentage point, to 8.01% as of 2:24 pm in Mumbai, according to the central bank’s trading system. The price gained the most since 31 Jannuary, adding 0.72, or 72 paise per Rs100 face amount, to Rs100.40. Bond yields move inversely to prices.
The rate banks charge each other for overnight loans fell as low as 5.8% today, from as high as 67.5% on 21 March, on speculation increased government spending in the fiscal year started 1 April will boost the spare cash at banks.
Deposits at banks rose 25% in the year through 16 March, compared with 18% in the previous 12 months, according to central bank data.
Ten-year yields last week had the biggest gain in almost two months after the Reserve Bank of India on 30 March unexpectedly raised its key interest rate to a 4 1/2-year high of 7.75%.
Bonds may pare gains on speculation the central bank will increase its benchmark rate for the second time in less than a month at its 24 April policy meeting to moderate inflation.
The inflation rate has averaged 6.4% in 2007, from 4.8% the previous year, as the nation’s economy grows at the second-fastest pace among the world’s major economies. The Reserve Bank has raised rates nine times since October 2004 to slow rising prices.
“We are still in a monetary tightening cycle, with scope for a couple of interest-rate increases more,” said Sanjeet Singh, a bond trader in Mumbai at ICICI Securities Ltd, a primary dealer that underwrites government debt sales. “There is a very high possibility of a rate increase this month. Strong demand for commodities and excess liquidity will sustain inflationary pressures.”
Growth in Asia’s fourth-largest economy probably accelerated for a third year to 9.2% in the 12 months ended 31 March, according to the government. It grew 9% the previous year.
The world’s biggest movers are based on changes in price yield and are screened for the size of the market and amount of daily trading.