Mumbai: Indian federal bond yields backed away from near five-year highs on 14 June as dealers speculated an impending cash crunch in the banking system may not be as severe as previously thought.
Auctions of Rs22,000 crore ($5.4 billion) of bond and bills this week and expected corporate tax payments of about Rs20,000 crore had raised concerns of a cash squeeze that would prompt banks to sell debt to generate funds.
But overnight cash rates, an indicator of available cash, were quoting at 2.8-2.9% on 14 June, down from 3-3.3% the previous day and compared to around 6% when cash supplies are sufficient to meet market needs.
At 9:40am (0410 GMT) the yield on the benchmark 10-year bond was at 8.37%, lower than 8.4% the previous day, its highest close since last August.
The yield has risen 17 basis points so far this week, and if it tops 8.43%, it will be at its highest since December 2001.
“Overnight cash rates may rise at most to about 6%, as banks have stashed a lot of cash in liquid funds,” a local trader said.
According to data from the Association of Mutual Funds in India, liquid funds saw a net inflow of Rs36,588 crore ($9 billion) in May, compared with Rs7,380 crore ($1.82 billion) in April.
The government will sell Rs6,000 crore ($1.5 billion) of bonds maturing in 2017 on Friday, 15 June. It auctioned Rs5,000 crore of the same bond on 12 June, and has sold Rs11,000 crore worth of treasury bills this week.