Mumbai: India’s 10-year government bonds declined the most in almost three weeks on speculation policymakers will cut the amount of debt banks are required to hold to free up cash.
Benchmark yields climbed from near a five-month low as a reduction in the so-called statutory liquidity ratio, or SLR, will damp demand for the securities. India’s banking rules require lenders to invest 25% of their deposits in debt.
A 1 percentage point cut may potentially free up Rs35,000 crore, said S. Srikumar, chief debt trader at state-owned Corporation Bank.
“The talk in the bond market is about a reduction in SLR, which could be announced as early as this evening,” said Mumbai-based Srikumar. “The market is expecting a 1 percentage point cut.”
The yield on the benchmark 8.24% note due April 2018 climbed 15 basis points to 7.94% at the 5.30pm close in Mumbai, according to the Reserve Bank of India’s (RBI’s) trading system. The price dropped 0.98, or 98 paise per Rs100 face amount, to 101.95.
A basis point is one-hundredth of a percentage point.
India this month made the steepest cut in the proportion of deposits banks must hold in reserves, cancelled a government bond auction and held extra money auctions to ease the tightest cash crunch in 19 months in the local financial system. Finance minister P. Chidambaram said on Monday that the government may announce more steps to boost cash in the financial system.
RBI reduced the so-called cash reserve ratio, or CRR, by 1.5 percentage points, the most since 2001, to 7.5%, with effect from 11 October. The move released Rs60,000 crore into the banking system.
The central bank on Tuesday supplied Rs3,500 crore to banks via an additional 15-day securities repurchase auction.
Bonds also fell as crude oil gained almost 9% this week on the New York Mercantile Exchange, tempering optimism that inflation will slow, Srikumar said.
India imports almost three-fourths of the oil it uses. Faster inflation erodes the return from debt securities.
The country’s inflation rate fell to a 15-week low of 11.8% in the week to 27 September.
The cost of benchmark interest rate swaps, or derivative contracts used to guard against rate fluctuations, rose. The five-year swap rate, a fixed payment made to receive floating rates, climbed to 7.29% from 7.22% on Tuesday.