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Bonds gain on rising cash at banks, spurs demand

Bonds gain on rising cash at banks, spurs demand
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First Published: Tue, Feb 27 2007. 01 23 PM IST
Updated: Tue, Feb 27 2007. 01 23 PM IST
Bloomberg
Mumbai: Indian bonds rose for a third day on speculation that increasing cash surpluses in the banking system will boost lenders’ demand for government debt.
The central bank withdrew the most funds from banks in more than two months on 26 February through its daily auctions of repurchase agreements, suggesting the amount of spare cash held by lenders is growing. The increase in spare funds was probably because the central bank sold foreign currency, said Parthasarathi Mukherjee, treasurer at UTI Bank.
“Things are looking rather good for bonds from the short- term point of view due to the improved liquidity,” Mumbai-based Mukherjee said. “It may have been due to the likely dollar sales by the central bank. The rising capital flows may have prompted such a move.”
The yield on the benchmark 8.07% note due January 2017 fell 3 basis points, or 0.03% to 7.86% , according to the central bank’s trading system. The price rose 0.22, or Re0.22 per Rs100 face amount, to Rs101.40. Yields move inversely to prices.
The Reserve Bank of India drained $4.2 billion (Rs1,850,099 crore) on 26 February from the banking system through its daily repurchase auctions, the most since 7 December.
Bonds may pare gains on speculation a report on 28 February will show economic growth accelerated last quarter, giving the central bank more reason to raise interest rates to curb inflation when policy makers next meet in April.
“We may see something in April,” said Shubadha Rao, chief economist at YES Bank in Mumbai. “It is often stated that monetary policy works with a lag. We so far haven’t seen much of it in any of the growth parameters,”he added.
The Reserve Bank increased its overnight lending rate for the fifth time in a year on 31 January to a four-year high of 7.5% to help bring inflation within its estimated range of 5% to 5.5% in the fiscal ending 31March.
Finance Minister Palaniappan Chidambaram may cut import tariffs when he delivers his budget for the financial year stating 1April. Chidambaram presented his first budget in 1996, when India’s economy was half its current $854 billion size.
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First Published: Tue, Feb 27 2007. 01 23 PM IST
More Topics: Money Matters | Equities |