India’s 10-Year Bonds Set for Second Weekly Drop on Cash Squeeze

India’s 10-year bonds headed for a second weekly decline on speculation fewer funds in the banking system will reduce demand for debt.

Lenders borrowed an average 1.3 trillion rupees ($26.4 billion) a day from the central bank this year to meet cash shortages, more than double the 600 billion rupees “comfort zone” indicated by the Reserve Bank of India in its Jan. 24 policy statement. A rise in oil prices to near a six-week high may also pressure Indian refiners to increase fuel costs, according to Paresh Nayar, head of money-market and currency trading at FirstRand Bank.

“People are concerned about the liquidity shortage,” Mumbai-based Nayar said. “Inflation worries may resurface with oil prices inching up again.”

The yield on the 8.79 percent notes due November 2021 rose one basis point, or 0.01 percentage point, this week and today to 8.21 percent as of 9:55 a.m. in Mumbai, according to the central bank’s trading system.

The finance ministry will sell 120 billion rupees of government bonds due in 2018, 2021 and 2041 today.

Crude for March delivery was at $102.45 a barrel on the New York Mercantile Exchange after closing at $102.31 yesterday. India imports about 80 percent of its oil needs.

India’s inflation slowed to the lowest level in 26 months in January. The wholesale-price index rose 6.55 percent, compared with 7.47 percent in December, according to official data. The rate held above 9 percent in the previous 12 months.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell five basis points this week to 8.08 percent, according to data compiled by Bloomberg.

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

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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