India’s 10-year bonds completed the best week in almost a month on speculation the central bank’s debt purchases will ease a cash shortage in the banking system and bolster demand for fixed-income securities.
Yields (GIND10YR) fell to a nine-month low as the Reserve Bank of India bought 88.2 billion rupees ($1.8 billion) of government notes at an auction today. The monetary authority may also consider buying dollars to release funds into the banking system, Deputy Governor Subir Gokarn said in an interview in Mumbai yesterday.
“Liquidity is still pretty tight,” said Paresh Nayar, Mumbai-based head of money-market and currency trading at FirstRand Bank Ltd. “Investors are expecting more debt purchases by the RBI to help overcome the situation.”
The yield on the 8.79 percent bonds due November 2021 declined 19 basis points, or 0.19 percentage point, this week to 8.17 percent in Mumbai, according to the central bank’s trading system. That is the biggest drop since the five-day period ended Jan. 6, according to data compiled by Bloomberg. The rate rose three basis points today.
Lenders’ borrowed an average 1.3 trillion rupees a day from the central bank this week to meet cash shortages. That is more than double the 600 billion rupees “comfort zone” indicated by the Reserve Bank in its Jan. 24 policy statement.
“To the extent that pressure remains, we are always open to carrying out further open-market operations,” Gokarn said. “The other form of liquidity infusion is to buy up dollars. If circumstances are right, we’ll certainly consider it. When we’ll have those circumstances is difficult to say.”
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell 10 basis points this week to 8.05 percent, according to data compiled by Bloomberg. The rate dropped four basis points today.
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