Bonds take hit as tax outflow drains cash

Bonds take hit as tax outflow drains cash

Mumbai: Government bonds fell on Monday as last week’s tax outflow drained funds from the banking system.

Indian companies may have paid as much as Rs30,000 crore ($7.4 billion) as the second instalment of their advance taxes, according to Suresh Pai, chief of fixed income at state- owned Canara Bank Ltd.

The tax deadline was 15 September. Bonds also fell as lending rates between banks rose to the highest in a month, discouraging the purchase of debt with borrowed funds.

“We won’t see the kind of cash surpluses that we have witnessed in the recent past," Mumbai-based Pai said. “There are more reasons for yields to rise than fall."

The yield on the 7.99% note maturing July 2017 held at 7.86% at the close in Mumbai, according to the trading system of the Reserve Bank of India (RBI). The price fell 0.575, or 6 paise per Rs100 face amount, to Rs100.83. Yields move opposite to prices.

Overnight borrowing rates rose to as much as 7.05% on Monday—the most this month—suggesting surplus funds at banks have declined. The rate has averaged 6.51% the past year.

RBI drained on average Rs21,120 crore through daily sales of securities last week, compared with Rs34,850 crore in the previous week. That suggests a drop in surplus cash in the system.

The central bank had said it will sell only short-term treasury bills.

RBI issued Rs10,000 crore of bills this month to prevent surplus funds from stoking inflation.