Indian government bonds fell for the second day after the central bank said it will triple the size of debt sales meant to absorb surplus funds this week.
The Reserve Bank of India (RBI) said on 23 March it will auction Rs6,000 crore ($1.4 billion) of two-year notes on 28 March, compared with Rs2,000 crore of bonds in each of the last two weeks. The additional supply may leave banks, the biggest buyers of government debt, with less funds to purchase fixed-income securities.
“The bond market wasn’t expecting the increase,” said Poonam Tandon, a trader at Development Credit Bank. “We aren’t seeing any positives for bonds in the immediate term and yields could harden.”
The yield on the benchmark 8.07% bond due in January 2017 rose five basis points, or 0.05 percentage point, to 7.99% as of 5:30 pm in Mumbai, according to the central bank’s trading system. The price fell 0.34, or 34 paise per 100-rupee face amount, to 100.48. Yields move inversely to prices.
RBI resumed the sale of the so-called market stabilization bonds earlier this month after a gap of almost two years to ensure excess money in the banking system doesn’t stoke inflation. Consumer prices rose 6.46% in the week ended 10 March from a year earlier, near a two-year high, a government report showed last week.
The cost of overnight funds rose to 13.5% from 9.5% on 23 March, making it more expensive to buy debt with borrowed money. The rate last week rose to the highest in at least eight years after cash in the banking system dwindled following a payment of advance taxes by companies on 15 March.
Bonds also fell on concern an increase in crude oil prices to a three-month high will spur inflation. India depends on imports to meet three-quarters of its annual energy needs.
“Inflation remains a concern, especially with higher oil prices, while prices on the manufacturing front don’t seem to let up,” Tandon said.
RBI governor Y. Venugopal Reddy, who will announce his next interest-rate decision on 24 April, has raised the overnight lending rate eight times since October 2004 to curb inflation. Starting in December, policymakers also raised the amount of cash that lenders must set aside to cover deposits, draining as much as Rs27,500 crore from the banking system.
The 10-year yield may rise as high as 8.25% by the end of April as the government prepares to release its auction calendar for the next fiscal, Tandon said.