Tight cash conditions push bond yields up

Mumbai, Sep 29 | Updated: Sep 30 2008, 07:34am hrs
Bond yields rose on Monday as squeezed cash conditions were further tightened by auction settlements and the central bank's rupee-buying intervention after the currency had dropped to a five-year low.

The overnight cash rate ended at a two-week high of 15.75/16%, even after the central bank had injected Rs 90,075 crore via its two repo auctions.

The benchmark 10-year bond yield ended at 8.62%, off an early peak of 8.73%, which was its highest since August 29, according to Reuters data, but still up three basis points from Friday's close of 8.59%.

The market will be closed on Tuesday for fiscal half-yearly closing of banks.

Traders estimated that the central bank's intervention in the currency market to support the rupee could have totaled about $1 billion on Monday.

"The borrowing schedule is very tight and that is expected to put further strain on liquidity," a dealer with a state-run bank said.

As well, settlement of Friday's Rs 10,000 crore bond auction drained cash, and the central bank will sell Rs 7,000 crore of treasury bills on Wednesday.

The government also said on Friday it would auction Rs 39,000 crore of bonds between October and mid-December, meaning it would reach its 2008/09 gross market borrowing target in the third quarter of the fiscal year.

Traders expect cash conditions to ease a bit in the later part of the week as a pay rise for government employees, including back pay, takes effect.

Meanwhile, rupee dived to a five-year low, as weak local and global stocks and month-end dollar demand from oil firms dragged heavily while intervention by state-run banks offered little respite.

It ended at 46.95/96 per dollar, off an intraday trough of 47.11, which was its lowest since June 2, 2003, and 0.9% weaker than 46.545/555 at the close on Friday.

"Since tomorrow is a holiday, the spill-over of the month-end dollar demand from commercial banks and a negative stock market ... pushed it below the psychological (47 to a dollar) level," said U Venkataraman, head of treasury at IDBI Bank.