10-year bond at 7.9%; Re at 44.19

Mumbai, Jan 22 | Updated: Jan 23 2007, 05:30am hrs
Indian bond yields rose on Monday on market jitters ahead of a bond auction this week, and expectations that the central bank will raise interest rates at its January 31 monetary policy review, reinforced the bearish sentiment. The yield on the benchmark 10-year bond ended at 7.90%, off an intra-day high of 7.92%. It ended at 7.79% on Friday.

After the market closed on Friday, the government announced an auction of Rs 5,000 crore of 14-year bonds on January 25. The maturity was shorter than 15-20 year bond indicated in the governments auction calendar. There had been speculation that the auction will be cancelled due to tight money conditions in the banking system.

The market fears the cut-off yield at the auction may be on the higher side. This could push up long-end yields, said a foreign bank trader. Traders said investors were also cautious ahead of the central banks policy review, as a two-year high in the inflation rate and robust economic growth increased the possibility of a rate rise.

On the inter bank call money market, the call rates ended at 7.8%-8.% indicating the squeeze in the liquidity condition. This can also be evinced from the RBIs LAF data where it injected Rs 5,465 crore and another Rs 8,995 crore in the system. The Indian rupee rose against the dollar on Monday on equity-related inflows, but traders remained cautious of provoking the central bank after its suspected intervention to cap the currency last week.

The rupee ended at 44.195/205 per dollar, firmer than Fridays close of 44.26/27. There were good inflows on Monday, but overall the market seems to be wary of taking long-rupee positions: no one wants to bet against the central bank, said the chief dealer with a foreign bank. Foreign funds invested a net $17.2 million in local stocks on Friday, and traders said that expectations of further inflows were lending some support to the rupee.

According to a JP Morgan index the rupee is overvalued by about 8.5% on a trade weighted basis, and the market is concerned that may be a level that the Reserve Bank of India is unhappy about. The six months annualised dollar premia ended at 3.89%, while the twelve months annualised dollar premium ended at 3.3%.