India’s 10-year bonds pared gains on concern the central bank will increase debt sales aimed at absorbing excess cash from the financial system.
The Reserve Bank of India drains surplus funds, which are partly generated by its dollar buying in the currency market, to curb money supply growth that may accelerate inflation.
The bank will sell Rs 4,000 crore ($982 million) of so-called stabilisation debt on August 16, adding to Rs 33,30 crore of bonds from eight state governments the same day.”The market wants to gauge how aggressive the RBI will get in selling stabilisation debt,” said Piyush Wadhwa, a trader at ICICI Securities Ltd, a primary dealer in Mumbai that underwrites government bond sales. “Traders will be rather cautious before the auctions.” The yield on the benchmark 7.49% note due April 2017 was little changed at 7.98% in Mumbai, according to the central bank’s trading system. It fell to 7.96% earlier. The price, which moves inversely to the yield, declined 0.02 to 96.70.
India’s central bank on August 8 raised the amount of stabilisation bonds it may sell in the fiscal year started April 1 by 36.4% to Rs 150 crore The move has triggered speculation among bond traders about a possible increase in the bank’s debt sales in the coming weeks. The monetary authority wants to slow money supply growth, which averaged 21% this fiscal year, to 17.5% or less. It has increased borrowing costs nine times since October 2004 to curb inflation. Finance minister P Chidambaram wants to lower the rate of inflation, which has averaged 5.6% this year, to 4%.
Bonds gained earlier on speculation excess cash in the banking system increased, leaving banks with more money to invest in debt. A rise in banks’ lending to the central bank indicated there’s more spare money in the financial system. Banks lent Rs 29,450 crore on Tuesday via the Reserve Bank’s reverse repurchase auction.Rupee traded near the lowest in almost a week on speculation importers stepped up dollar purchases to guard against a further decline in the currency. Losses in the rupee make it more expensive for importers such as Indian Oil Corp and Reliance Industries Ltd to raise the foreign exchange.