Mumbai: India’s 10-year bonds gained on speculation that last week’s slide pushed yields to an attractive level to tempt investors to buy.
Yields, which move opposite to price, reached the highest in almost eight months last week. Indian banks, the biggest buyers of government debt, may have bought bonds to use as collateral to borrow money from the central bank, said Rajesh Babu, a bond trader at state-owned Andhra Bank in Mumbai.
The overnight lending rate fell to 6.65%, near the lowest this month.
“Traders are finding these yields attractive and building positions before money gets tight again,” said Babu. “There’s better liquidity available in the system.”
The yield on the benchmark 8.07% bond due January 2017 fell seven basis points, or 0.07 percentage point, to 8.13% as of 2:54pm in Mumbai, according to the central bank’s trading system. The price of the security rose 0.45%, or 45p per 100-rupee face amount, to 99.60.
Ten-year bonds last week fell the most in almost two months after the Reserve Bank of India on 30 March unexpectedly raised the key interest rate by a quarter percentage point to curb inflation that stayed above 6% for 12 consecutive weeks. The central bank, aiming to contain it within 5%, also told banks to set aside more cash to cover deposits.
The increase in the cash reserve ratio by half a percentage point will drain as much as Rs1.55 lakh crore ($3.6 billion) from the banking system, the central bank said. The first of the two-phase increase takes effect on 14 April.
The Union government also plans to sell Rs1 lakh crore of bonds on 12 April, the first auction for the fiscal year that started 1 April, as part of its annual borrowing programme.
Bonds also rallied after the central bank didn’t announce any sale of so-called stabilization bonds for this week, which would’ve added to the government’s supply and pushed up yields, said Poonam Tandon, a bond trader at Development Credit Bank Ltd in Mumbai.
The Reserve Bank resumed the sale of such bonds last month after a gap of almost two years to prevent excess cash in the banking system from stoking inflation.
Lenders are also buying debt to meet a rule that requires them to hold government debt equivalent to 25% of their rise in deposits, Tandon said.
“Traders are taking a four-day view on the market and they aren’t seeing anything too negative immediately,” she said.
“Demand is also coming in from banks” as they meet their debt-holding requirement.