By Anil Varma, Bloomberg
Mumbai: Bonds headed for a second weekly drop on speculation corporate tax payments due next week will drain cash from banks, leaving lenders with less spare funds to invest in government debt.
Ten-year yields, which move inversely to prices, rose to the highest in almost three weeks as companies prepare to pay their fourth quarterly installment of taxes for the current fiscal year by 15 March. Firms may pay as much as Rs400 billion in tax this month, compared with the Rs280 billion they were estimated to have paid in December, according to a Bloomberg survey.
“The market isn’t sure about liquidity in the banking system in the coming weeks, given the large advance tax outflow later this month,” said Paresh Nayar, head of bond and currency trading at Development Credit Bank Ltd. in Mumbai. “We may see some tightness in liquidity from next week onward.”
The yield on the benchmark 8.07 % note due January 2017 rose 8 basis points, or 0.08 percentage point, to 8.01 % as of 2:08 p.m. in Mumbai, according to the central bank’s trading system. This is the biggest weekly decline since 16 February. The price fell 0.52, or 52 paise per Rs100 face amount, to 100.37.
Bonds pared gains on speculation money market rates near the lowest since December 2005 may spur some investors to purchase debt with borrowed funds.
Overnight loan rates in the money market fell after the central bank capped, effective 5 March, the amount banks can invest each day in its auctions at one-eighth of the average amount they spent in a day at such sales the previous week. The limit may have spurred banks with spare cash to invest more in the bond and money markets.
“The drop in call rates brings some comfort to the bond market, in the sense it has cut the cost of borrowing to fund bond positions,” said Namrata Padhye, a fixed-income analyst at IDBI Capital Market Services Ltd., a Mumbai-based primary dealer that underwrites government debt.
The 10-year yield may stay between 7.95 % and 8 % in the coming two weeks, Padhye said.
The rate banks charge each other on overnight loans was 5.55 % today, near the lowest since December 2005, compared with 6.05 % a week ago, according to data compiled by Bloomberg. Lower rates make it cheaper to buy debt with borrowed funds.
Bonds also fell after a government report showed inflation accelerated. The key wholesale price inflation rate accelerated to 6.1 % in the week ended 24 February from 6.05% in the previous week, the Ministry of Commerce & Industry said in a weekly report released in New Delhi today. Analysts had estimated the inflation rate would be 6.03 %.
The cost of India’s interest-rate swaps, derivative contracts used to guard against the risk of an increase in rupee-based rates, fell. The five-year swap rate decreased 1 basis point to 7.9 %.