Liquidity fears hit bonds

MARKET ROUND-UP

The bond prices ended down today as concerns over tight liquidity compounded following Reserve Bank of India Deputy Governor Usha Thorat's comment on auctions under Market Stabilisation Scheme (MSS).

Higher-than-expected cut-offs at state loan auctions dragged prices down further. Thorat said the higher ceiling under MSS will help in absorbing liquidity on an enduring basis.

"It means that even if there is some government spending after advance tax outflows, RBI will come out with MSS auction to drain the liquidity," said a senior treasury official at a private sector bank. After the RBI announced a low size of MSS in the second round, market was expecting the trend to continue, the official said.

The RBI will on Wednesday raise Rs 2,000 crore by selling 6.65 per cent, 2009 bond under the MSS.

"Sentiment is already jittery on concerns of liquidity tightening considerably after advance tax outflows. Thorat's comments only added to the fears," said another dealer. Around Rs 45,000-50,000 crore will flow out from the system as last instalment of advance tax later this week.

Also, after the unexpected rally on Monday, there was some profit-taking, dealers said.

On Monday, gilts rallied as foreign banks bought and hedged by receiving in overnight index swaps.

The Rs 2,300 crore state loan auction, however, had no major impact on sentiment today because the amount is not huge, dealers said.

The most-tracked 8.07 per cent, 2017 bond ended at Rs 100.68 (7.9664 per cent) against Rs 100.84 (7.9428 per cent) on Monday.