G-secs halt 2-day decline

Government securities halted two days of losses after crude oil prices fell to the lowest since June 2005, spurring optimism inflation will slow.

The highly traded 7.59 per cent bond due April 2016 closed unchanged from yesterday as crude oil in New York fell below $53 a barrel. India, which depends on imports of the commodity to meet three-fourths of its annual energy needs, benefits from lower oil prices as they help slow imported inflation.

"In a range-bound market, traders are taking cues from data such as crude oil prices," said Anoop Verma, a bond trader at Development Credit Bank in Mumbai. "There's been a significant decline in oil, which may ease some of the supply-side inflation concerns."

The 7.59 per cent bond yielded 7.53 per cent at the close of trading in Mumbai, according to the central bank's trading system. The benchmark 10-year bond wasn't traded pending a coupon payment on January 15. The daily average volume of bonds traded dropped to Rs 3,960 crore ($889 million) this month, almost to a fifth from November.

The inflation rate, as measured by wholesale prices, probably accelerated to 5.6 percent in the week ended December 30, near the highest since May 2005, according to the median estimate of 11 economists surveyed by Bloomberg News.

The ministry of commerce and industry will release the weekly report tomorrow in New Delhi at noon.

Policy makers at the central bank, who raised the overnight lending rate four times last year, will meet on January 31 to decide on interest rates.

Bonds held on speculation Governor Yaga Venugopal Reddy will raise the benchmark rate by a quarter percentage point to combat inflation as record growth fuels lending.

Output at factories, utilities and mines probably rose 11.3 per cent in November, almost twice October's pace, according to the median estimate of 16 economists in a separate Bloomberg survey. The Central Statistical Organisation will release the data tomorrow in New Delhi.

"Manufacturing inflation is surely high and pricing power is returning to companies, whether the central bank likes it or not," said K Ramanathan, who manages the equivalent of $561 million in Indian debt at ING Investment Management in Mumbai. "Given the current fundamentals, which are negative, the yields should be higher."

Ramanathan, who has sold bonds, said Reddy will raise the rate at which the central bank drains money from the banking system by as much as 75 basis points this year.

Bonds may also gain in coming days on speculation demand will rise from lenders, who need to hold at least 25 per cent of their deposits in government securities under a banking law.

They may start purchasing debt as deposits rise and their holdings fell close to the limit, according to ICICI Securities, a primary dealer that underwrites government bond auctions.

"The demand from banks because of this rule will keep bonds supported for some time," said Development Credit Bank's Verma.