Indian Bonds Complete Monthly Advance as Reserve Bank Buys Debt

India’s benchmark bonds completed a monthly gain as the central bank continued debt purchases to ease a cash squeeze in the banking system.

Yields fell after the Reserve Bank of India cut the amount of deposits lenders need to set aside as reserves to 5.5 percent from 6 percent on Jan. 24, the first reduction since 2009. The monetary authority, which has bought 1 trillion rupees ($20.4 billion) of bonds since November, will offer to purchase as much as 120 billion rupees of government notes this week, the central bank said in a statement yesterday.

“Bond purchases are supporting the drop in yields despite tight cash conditions,” said M. Natarajan, the Mumbai-based head of treasury at Bank of Nova Scotia. (BNS) “One more reduction in the reserve ratio next month also looks like a done deal.”

The yield on the 8.79 percent notes due November 2021 declined six basis points, or 0.06 percentage point, to 8.21 percent in Mumbai this month, according to the central bank’s trading system. The rate fell one basis point today.

Lenders borrowed a record 1.8 trillion rupees at the Reserve Bank of India’s repurchase auction today, according to RBI data, three times the maximum of 600 billion rupees favored by the central bank. The next policy review is due on March 15.

India’s economy grew at the slowest pace in more than two years last quarter as domestic demand weakened and the global recovery faltered, adding pressure on the central bank to lower interest rates.

’Subdued Growth’

Gross domestic product rose 6.1 percent in the three months through December following the previous quarter’s 6.9 percent gain, the Central Statistical Office said in a statement in New Delhi today. The median of 29 estimates in a Bloomberg News survey was for a 6.3 percent advance.

“Growth will remain subdued in the next few quarters,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. “Slowing growth and cooling inflation are creating conditions for the RBI to cut rates, but a larger budget deficit is limiting the central bank’s space.”

Varma predicted the central bank will cut the cash reserve ratio by 50 basis points in March. Nomura expects the repurchase rate, at which the monetary authority lends to banks, to be reduced by 100 basis points to 7.5 percent in 2012.

The nation’s budget deficit exceeded the full-year target in the first 10 months of the fiscal year ending March 31, the Controller General of Accounts said on its website today. The shortfall was 4.35 trillion rupees, compared with an aim of 4.13 trillion rupees.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell two basis points this month to 8.14 percent, according to data compiled by Bloomberg. The rate fell four basis points today.

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

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.