India’s 10-year bonds fell the most in more than two months after the government announced a surprise sale of the securities, spurring concerns that more such auctions to fight inflation will reduce demand.
The government said it will auction Rs5,000 crore ($1.2 billion) of the debt on Tuesday, in addition to a previously scheduled sale of Rs6,000 crore on 15 June. The central bank also more than doubled the amount of treasury bills it sells this week than usual, pushing the key yield to the highest since August.
“The central bank can’t allow liquidity to remain easy, and they may announce more mop-up measures,” said K.P. Suresh Prabhu, chief bond trader at HDFC Bank Ltd in Mumbai. “Bond yields will be under pressure to rise.”
The yield on the 8.07% bond maturing January 2017 rose nine basis points, or 0.09 percentage point, to 8.23% at the 5.30pm close of trading in Mumbai, according to the central bank’s trading system. The price fell 0.62, or 62 paise per Rs100 face amount, to 98.92.
The yield, which moves inversely to prices, may range between 8.15% and 8.25% in the coming days, Prabhu said.
The Reserve Bank of India (RBI), which aims to slow inflation to 5% in the fiscal year ending 31 March and to as low as 4% in the “medium term”, is up against an increase in capital from abroad that is adding rupees to the banking system.
Governor Yaga Venugopal Reddy, in a speech at the Banco Central de Chile last week, said such flows are “complicating the conduct of monetary policy”, and vowed to contain money expansion to as low as 17% this fiscal year. The M3 measure of money supply grew 19.6% in the two weeks through 25 May from a year earlier, the central bank said last week.
The rate at which banks lend to each other overnight fell below 0.5% last week, and rose to 3.25% on Monday, suggestingthat banks have enough funds left after lending and spending needs. RBI lends money overnight at 7.75%.
RBI has a limit on the amount of bonds it can sell to remove excess funds from the banking system. It may be left with fewer options after it raised the limit twice in April to Rs1.1 trillion, Prabhu said. “That could be a reason for the unscheduled debt auctions,” he added.
A government report last week showed that inflation slowed to 4.85% in the week ended 26 May, the lowest in almost nine months. Another report on Tuesday may show industrial output grew 11.3% in April, compared with a gain of 12.9% in the prior month, according to the median estimate of 14 economists surveyed by Bloomberg.
Bonds may also decline in the coming days on concerns that quarterly advance tax payments due this week will remove as much as Rs20,000 crore, leaving domestic banks, the biggest buyers of government securities, with less money to buy debt.
The government on Monday sold Rs5,000 crore of treasury bills maturing in 91 days and 182 days, and will sell an additional Rs2,500 crore of the six-month security on 13 June.