Indian 10-year bonds slump; post biggest weekly loss in five months

By Archana Narayanan

MUMBAI (Reuters) - Indian benchmark 10-year bonds slumped on Friday to post their worst weekly fall since early November after the central bank's first debt auction of the new fiscal year was under-subscribed for one of the tranches, setting off concerns about weak demand.

The Reserve Bank of India (RBI) devolved to primary dealers 8.64 billion rupees out of the 30 billion rupees sale on offer for the 9.23 percent 2043 bonds. Overall, the RBI sold 160 billion rupees worth of debt.

The resumption of weekly debt auctions comes in a week in which the RBI disappointed investors by curbing access to its overnight funding window in a bid to push banks to get funding in the repo markets during its policy review.

Although cash conditions should not tighten significantly as long as the RBI injects funds via term repos, traders say it would likely lead to reduced bond purchases via open market operations just as the country resumes bond sales.

"I see pain continuing in the market with yields headed towards 9.15 percent unless RBI steps in with verbal intervention or improves cash condition further," said Harish Agarwal, a dealer with First Rand Bank in Mumbai.

The benchmark 10-year bond yield rose 6 basis points to end at 9.07 percent, its highest level since December 6.

For the week, the yield rose 26 bps, its biggest increase since surging 28 bps on the week ended November 8, when markets were also hit by concerns about the lack of OMOs.

Traders had welcomed OMOs as way to profitably sell debt, especially as the markets absorb heavy supply.

India is due to sell an average of 170 billion rupees per week during April-September, higher than last year's average borrowing of 150 billion rupees per week.

In the overnight swaps market, the benchmark five-year rate closed 1 basis higher at 8.61 percent, while the one-year rate ended unchanged at 8.65 percent.