Bonds drop on rate-hike speculation

MONEY MARKET ROUND-UP

Ten-year government bonds fell on speculation the central bank will raise interest rates to curb inflation in the world’s second fastest growing major economy.

The yield on the 6.35 per cent bond maturing in January 2020 rose after the Reserve Bank of India (RBI) announced plans to auction Rs 23,900 crore ($5.2 billion) of bonds and bills this week. Investors expect the 10-year yield to inch up above 7.70 per cent, while some predict it to move closer to 8 per cent, said Sanjay Arya, treasurer at state-owned Bank of Maharashtra in Mumbai. The yield on the 10-year bond rose six basis points to 7.63 per cent as of the 5:30 pm close in Mumbai, according to the central bank’s trading system. The price fell 0.38, or 38 paise per 100-rupee face amount, to 91.14. A basis point is 0.01 percentage point.

The yield on the benchmark 10-year debt increased 2.4 percentage points last year, the biggest gain since at least 1999. Indian bonds were the worst performers in 2009 among 10 Asian local-currency debt indexes compiled by HSBC Holdings Plc, slumping 5 per cent as the government unveiled a record borrowing plan to bridge a 16-year high budget deficit.

The cost of five-year interest-rate swaps, derivative contracts used to guard against changes in borrowing costs, increased. The rate, a fixed payment made to receive floating rates, rose seven basis points to 6.98 per cent.

Re rises as faster growth may lure funds to stocks
Rupee rose the most in almost two months, extending last year’s gains, on speculation an improving economy will bolster global demand for the nation’s stocks.

Overseas investors purchased $17.5 billion of stocks in 2009, contributing to a 4.5 per cent advance in the rupee and an 81 per cent rally in the Bombay Stock Exchange’s Sensitive Index.

Finance Minister Pranab Mukherjee last month forecast growth of as much as 8 per cent for the fiscal year ending March 31, more than the central bank’s 6 per cent projection.

“The fundamentals at present are strong and make the rupee an attractive investment,” said Sudarshan Bhatt, chief currency trader at state-owned Corporation Bank in Mumbai. “I expect the rupee’s advance to accelerate.”

The rupee climbed 0.7 per cent to 46.3025 a dollar as of the 5 pm close in Mumbai. It will strengthen to 44 this year, according to the median estimate of analysts surveyed by Bloomberg.

Offshore contracts indicate bets the rupee will trade at 46.29 a dollar in a month, compared with expectations of 46.66 on January 1. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars rather than the local currency.