Mumbai: Government bonds rose for the second week on speculation that banks will purchase more debt to meet minimum holding needs as their deposits increase.
The yield on the benchmark 10-year notes fell to the lowest in more than a week as banks bought debt to meet the statutory liquidity ratio, under which, banks need to invest at least 25% of their deposits in government debt or other low-risk securities approved by the central bank.
“Banks pushed their deposit mop-up toward the end of the last fiscal year” meaning they now have to buy more debt, said K.P. Suresh Prabhu, chief of fixed-income at Mumbai-based HDFC Bank Ltd. “That has helped prices rise.”
The yield on the benchmark 8.07% bond due January 2017 fell 4 basis points, or 0.04 percentage points, to 8.06% on Friday, from a week before, according to the central bank’s trading system. The price rose 0.22, or 22 paise per 100-rupee face amount, to Rs100.02. Yields move inversely to prices.
Indian banks have stepped up efforts to increase their deposits after the Reserve Bank of India (RBI) increased the amount of cash that lenders must set aside to cover deposits three times between December and March, draining funds from the system.
Total bank deposits rose Rs4.85 lakh crore, or 23%, in the fiscal year ended 31 March, compared with an 18.1% gain in the previous 12 months.
Bonds pared gains after a government report on Friday showed wholesale price inflation accelerated more than economists expected.
Ten-year yields rose after the ministry of commerce and industry said the inflation rate was 6.09% in the week ended 7 April, up from 5.74% the week before.
“I think the upward pressure on prices in the economy still exists,” said S.P. Prabhu, chief of fixed-income at IDBI Capital Market Services Ltd, a Mumbai-based primary dealer that underwrites government debt sales.
RBI governor Y.V. Reddy has increased the rate at which the central bank lends to banks twice this year, by a quarter percentage point each time, to curb inflation.