Bonds halt gains as jump in overnight rate slows demand

Eleven-year bonds were little changed after halting gains as a surge in money-market rates made it costlier for investors to buy debt with borrowed funds.

The overnight call money rate rose to a four-month high of 7.25 per cent, from 6.85 per cent at the beginning of this week, reflecting a shortage of cash in the banking system after companies settled quarterly tax bills yesterday.

The Reserve Bank of India, which has raised its policy rates seven times in the past year, will review borrowing costs tomorrow. All 26 economists in a Bloomberg survey forecast the repurchase auction rate will be increased by 25 basis points to 6.75 per cent.

The yield on the 8.08 per cent bond due August 2022 was 8.08 per cent at the 5 pm close of trading in Mumbai, after a 2 basis-point decline yesterday, according to the central bank’s trading system. A basis point is 0.01 percentage point.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, rose five basis points to 7.37 per cent.

Rupee gains
The rupee gained for the second day this week as stock exchange data showed overseas investors increased holdings of the nation’s shares this month for the first time since December.

The rupee appreciated 0.3 per cent to 45.1175 per dollar at the 5 pm close in Mumbai, according to data compiled by Bloomberg.

The rupee strengthened after Chakravarthy Rangarajan, chairman of Prime Minister Manmohan Singh’s Economic Advisory Council, said yesterday that Japan’s earthquake and its aftermath will have only a ‘marginal’ impact on India’s economy.

Indian exports to Japan make up only 2 per cent of the nation’s total overseas sales while foreign direct investment from Japan accounts for 4 per cent of the inflows, according to India’s commerce ministry data.

Offshore forwards indicate the rupee will trade at 45.97 in three months, compared with expectations of 46.12 yesterday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.