Bond yields near 2011 low as banks meet debt threshold

India’s 11-year bond yields are close to their lowest level this year on speculation of banks buying the notes to comply with a central bank order on debt holdings before the financial year ends this month.

Lenders have to invest 24 per cent of their deposits in finance ministry notes and approved securities and declare the assets to the Reserve Bank of India. Deposits rose to a record $1.1 trillion as of March 11, according to central bank data issued on March 25.

“Bond prices are staying high due to sustained demand from banks before the financial year close,” said Rs Chauhan, head dealer of fixed income and currency trading in Mumbai at State Bank of Bikaner & Jaipur. “These levels may be sustained for a couple of days more.”

The rate on the 8.08 per cent note, due on August 2022, rose three basis points to 8.06 per cent at close in Mumbai, according to the central bank’s trading system. The rate earlier touched 8.02 per cent, the lowest since December 16.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, decreased. The rate, a fixed payment made to receive floating, dropped three basis points to 7.42 percent.

Higher oil prices may accelerate inflation in India and hurt economic growth, the nation’s central bank Governor Duvvuri Subbarao said.

“India is a large importer of oil and as much as oil prices go up it will have an impact on our inflation,” Subbarao told reporters in Colombo, Sri Lanka, on Tuesday. “But it will also have an impact on our growth. So the challenge is to manage the growth and inflation impact of higher oil prices.”

Rupee rises on optimism
The rupee strengthened for the seventh day on optimism of export growth helping narrow the nation’s current-account deficit.

An RBI report this week is expected to show the shortfall narrowed to $9.15 billion in the fourth quarter from $15.8 billion in the previous three months, according to the median estimate of economists in a Bloomberg survey. Overseas shipments rose 32.4 percent in February from a year earlier. The Bombay Stock Exchange’s Sensitive Index advanced for a sixth day.

Call rate weak
The call rate remained weak on the overnight call money market on Tuesday on excess of liquidity in the system.

Call rate finished further lower at 7.30 per cent from 7.50 per cent yesterday. It moved in a range of 7.50 per cent and 7.25 per cent. The Reserve Bank of India, under the Liquidity Adjustment Facility (LAF), purchased securities worth Rs 55,805 crore from 39 bids at one-day repo auction at a fixed rate of 6.75 per cent.