Mumbai: India’s 10-year bonds fell for the fifth month as banks sold debt to raise cash, after increasing reserves to meet new Reserve Bank of India (RBI) regulations.
Yields rose to the highest in more than three weeks after banks were required to raise cash set aside as reserves to 6.5% of deposits from 6.25%, starting 28 April. That drained Rs7,750 crore from the banking system. Bonds also fell on concerns that payment for government debt sold on 27 April will further reduce banks’ spare cash.
“Bonds will show a negative trend this week due to the pressure on liquidity,” said K.P. Suresh Prabhu, chief of fixed-income trading at Mumbai-based HDFC Bank Ltd. “The increase in cash reserves and the payments for the auction will reduce banks’ funds.”
As of the 5:30pm close in Mumbai, the yield on the benchmark 8.07% note, due January 2017, rose 17 basis points to 8.18% from a month before, according to RBI’s trading system. The yield, which moves inversely to price, is the the highest since 5 April. The price fell by Rs1.15 per Rs100 face value, to Rs99.27.
Reserve banking: New RBI regulations require banks to maintain 6.5% of deposits as cash reserves, up from 6.25% before 28 April
The increase in banks’ cash reserves on 28 April was the second this month, and took the total amount of money drained this way from banks to Rs15,500 crore. Lenders had boosted reserves to 6.25% of deposits from 6% on 14 April.
Investors paid Rs6,000 crore on Monday for 10-year government debt auctioned by RBI on 27 April.
The government has sold a total Rs16,000 crore of debt this month, the most in a month since August 2006, as part of its annual borrowing programme.
Bonds pared gains on speculation that inflation will slow in the coming weeks due to accelerated price gains during the same period of the previous year. The average inflation rate had risen to 4.8% in May 2006 from 3.8% in April.
“Inflation is expected to remain easy largely on account of the statistical-base effect,” said Namrata Padhye, a fixed- income analyst at IDBI Capital Market Services Ltd, a Mumbai-based primary dealer that underwrites government debt.
The rate of inflation was 6.09% in the week ended 14 April, unchanged from the previous week.