India’s Bond Yields at 31-Month Low Before RBI Debt Purchase

By V. Ramakrishnan 

India’s bonds gained, sending the 10-year yield to a 31-month low, on optimism a central bank plan to buy debt this week will ease a cash shortage and spur demand.

The Reserve Bank of India will, on March 1, purchase as much as 100 billion rupees ($1.9 billion) of government securities due in 2014, 2016, 2022 and 2025, according to a statement yesterday. Lenders borrowed an average of 1.1 trillion rupees a day from the monetary authority’s repurchase window this month, compared with 941 billion rupees in January, central bank data show, as the government reined in spending to reduce its budget deficit and avert a ratings downgrade.

“We expect the RBI to keep conducting purchases through open-market operations to tackle the liquidity deficit conditions,” said Vivek Rajpal, a strategist at Nomura Holdings Inc. in Mumbai. “As we head into March, liquidity conditions are expected to worsen further, leading us to believe that there will be two to three more debt-purchase auctions.”

The yield on the 8.15 percent notes due June 2022 fell one basis point, or 0.01 percentage point, to 7.79 percent as of 9:13 a.m. in Mumbai, according to the central bank’s trading system. It touched 7.78 percent earlier, the lowest level since July 2010.

The tightness in cash availability is a result of the government’s fiscal consolidation drive, said Rajpal, adding that the squeeze could worsen next month as companies are scheduled to pay as much as 650 billion rupees in taxes.

Finance Minister Palaniappan Chidambaram, who will present his annual budget to parliament on Feb. 28, will seek to narrow the fiscal shortfall to 4.8 percent of gross domestic product in the year starting April, from this year’s goal of 5.3 percent, according to a Bloomberg survey of analysts and investors. That would be the least since the 12 months through March 2008.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell two basis points to 7.62 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: V. Ramakrishnan in Mumbai atrvenkatarama@bloomberg.net

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