Bonds drop as RBI avoids extra buying

Government bonds dropped after the central bank refrained from exercising an option to buy an additional Rs 3,000 crore of debt in full at its open-market operation today.

The yield on the most-traded note due in 2018 rose for a third day after the Reserve Bank of India (RBI) said it bought bonds worth Rs 7,710 crore. It had scheduled to buy securities worth Rs 6,000 crore, with an option to purchase 50 per cent more. The central bank, which lowered interest rates yesterday for the second time this year, is buying existing debt to help boost cash and cap yields amid record government borrowing.

“Investors had high expectations that RBI would help them absorb the huge supply from the government,” said S Srikumar, chief fixed-income trader at state-owned Corporation Bank. “The premium to adjust the supply will increase.”

The yield on the 8.24 per cent note due April 2018 climbed 8 basis points to 6.51 per cent at close. The price fell 0.55, or 55 paise per Rs 100 face amount, to Rs 111.75.

RBI said on February 10 that it would buy securities from investors for “more effective liquidity management” as the government unveiled record debt sales to fund stimulus spending.

Government Sales
The government plans to sell bonds tomorrow worth Rs 8,000 crore of the 6.05 per cent bonds maturing in 2019, and securities worth Rs 2,000 crore each of the 8.24 per cent securities due in 2027 and 6.83 per cent notes due 2039.

India plans to sell debt worth Rs 2.6 lakh crore for the fiscal year to March 31, 80 per cent more than it had initially targeted. Sales are set to rise to Rs 3.62 lakh crore next year.

Bonds had gained earlier after the rate reductions. RBI cut both its overnight lending and borrowing rates by half a percentage point each to 5 per cent and 3.5 per cent after India’s economy expanded at the slowest pace in five years amid a global recession.

“The central bank has been pro-active on broader issues and investors are going to price that now,” said Jayant Chiney, treasurer at Bank of India in Mumbai. “Debt securities are going to be an attractive investment option in the near term.”

Growth Slows
Prime Minister Manmohan Singh’s government has backed the monetary stimulus by lowering taxes and increasing spending on infrastructure.

India’s economy expanded 5.3 per cent in the three months to December 31 from a year earlier, after a 7.6 per cent gain the previous quarter, the statistics agency said last week. Exports declined last quarter for the first time in seven years.

A government report today showed inflation slowed to a six-year low. Wholesale prices climbed 3.03 per cent in the week to February 21 from a year ago, after gaining 3.36 per cent the previous week, the commerce ministry said today.

The cost of five-year swaps, or derivative contracts, used to guard against rate fluctuations, climbed for a fourth day. The rate, a fixed payment made in return for floating rates, rose to 5.34 per cent from 5.18 per cent yesterday.

Call rates steady
Money market rates traded rangebound with the call trading at an average around 4.07 per cent vis-à-vis its previous closing of 4.05 per cent and the CBLO at an average of 3.65 per cent vis-à-vis 3.67 per cent observed earlier.