Indian Bond Yields Drop to 2-Week Low on Reserve-Cut Speculation

India’s 10-year bonds rose, pushing yields to the lowest level in more than two weeks, as the central bank signaled it will take additional steps to ease a cash squeeze in the financial system.

The Reserve Bank of India will consider increasing its open-market debt purchases and lowering lenders’ reserve requirements to release funds if necessary, Deputy Governor Subir Gokarn said in Mumbai today. Banks borrowed an average 1.3 trillion rupees ($26.4 billion) a day from the monetary authority this quarter to meet cash shortages, compared with 882 billion rupees in the prior period, central bank data show.

“Given the tight liquidity, a cut in reserve requirements looks possible anytime now,” said R.S. Chauhan, chief dealer of treasury at State Bank of Bikaner & Jaipur. “The RBI may also announce more debt purchases to boost cash.”

The yield on the 8.79 percent notes due November 2021 fell one basis point, or 0.01 percentage point, to 8.17 percent in Mumbai, according to the central bank’s trading system. That is the lowest level since Feb. 3. Financial markets in India were shut yesterday for a public holiday.

The Reserve Bank has bought 906 billion rupees of sovereign debt since the start of November via open-market auctions, central bank data show.

“Open-market operations remain an option as we go along and to the extent the opportunity is available for a cash reserve-ratio cut, we will also consider that,” Gokarn told reporters today.

The Reserve Bank reduced the amount of deposits lenders need to set aside as reserves to 5.5 percent from 6 percent on Jan. 24, the first cut since 2009.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell two basis points to 8.07 percent, according to data compiled by Bloomberg.

-With assistance from Anoop Agrawal in Mumbai. Editors:

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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