Mumbai: India’s 10-year bonds gained the most in more than two months, the biggest fluctuation in any government debt market on 10 April, on optimism that a drop in money market rates is encouraging banks to buy the securities.
Benchmark bonds also rallied after yields last week climbed to the highest levels scaled in almost eight months, making them attractive to banks, which are required by law to maintain debt holdings at a minimum level of one-fourth 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 Mumbai-based UTI Bank Ltd.
“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,” he added.
The yield on the benchmark 8.07% bond due January 2017 fell 10 basis points, or 0.1 percentage point, to 8.02% as of the 5:30pm close in Mumbai, according to the Reserve Bank of India’s (RBI) trading system.
The price gained the most since 31 January, adding 64 paise per 100-rupee face amount, to 100.32. Bond yields move inversely to prices.
The rate banks charge each other for overnight loans fell as low as 5.8% on 9 April, from as high as 73.5% on 30 March, on speculation that 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 RBI data.
Ten-year yields last week witnessed the biggest gain in almost two months after the banking regulator, RBI, on 30 March unexpectedly raised its key interest rate to a four-and-a-half-year high of 7.75%.
Bonds pared gains on speculation that 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, compared with 4.8% the previous year, as the nation’s economy grows at the second-fastest pace among the world’s major economies. RBI 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,” he added.
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% during the previous year.
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