Call rates at 23%, bonds gain most in 4 years

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Oct 10 : The country’s 10-year bonds completed the biggest weekly gain in more than four years after the nation made the steepest cut since 2001 in the amount of cash banks must hold in reserve, boosting funds in the financial system.

Yields on 10-year notes fell to the lowest since May after the Reserve Bank of India reduced the so-called cash reserve ratio to 7.5 percent from 9 percent to inject 600 billion rupees ($12.5 billion) into the banking system. The government also canceled an auction of Rs 10000 crore of bonds scheduled for Friday to ease pressure on the nation’s cash-strapped banking system.

“The auction cancellation and the reserve ratio reduction are strong measures aimed at boosting liquidity in the banking system, and bring comfort for the bond market,” said Namrata Padhye, a bond strategist at IDBI Gilts Ltd, a Mumbai-based primary dealer that underwrites government debt sales. The yield on the benchmark 8.24% note due April 2018 fell 50 basis points to 7.8% as of the 5.30 pm close in Mumbai, according to the central bank’s trading system. The price rose 3.32 per Rs 100 face amount to 102.95. A basis point is 0.01 percentage point.

Reserve Bank governor Duvvuri Subbarao rushed to free up cash after money-market rates surged to an 18-month high and financial stocks led by ICICI Bank Ltd had their biggest slump in 4½ years.

The rate at which banks lend to each other overnight on Friday climbed as high as 23%, the most since March 2007, according to data compiled by Bloomberg.

Meanwhile, the rupee bounced off a record low on Friday after the central bank sold dollars through state-run banks in an attempt to prevent the currency from further steep falls as the stock market dropped sharply. It ended at 48.38/43 per dollar, 0.8% lower than 47.99/48.01 at close on Wednesday.