Indian Bonds Advance on Speculation Banks Will Maintain Holdings

India’s bonds rose for a second day on speculation banks will refrain from paring holdings, even after the central bank cut their debt-investment requirements, as a slowing economy saps demand for loans.

The Reserve Bank of India lowered this week the proportion of deposits lenders must hold in fixed-income securities to 23 percent from 24 percent with effect Aug. 11, the first reduction since 2010. The cut in the so-called statutory liquidity ratio may not spur lending immediately, analysts at Barclays Plc including Singapore-based Kumar Rachapudi wrote in a research note, prompting banks to keep spare funds invested in debt.

“Banks are unlikely to decrease their bond holdings, given that demand for credit remains muted,” analysts at Barclays wrote. “We continue to recommend staying long on 10-year government bonds.”

The yield on the 8.15 percent securities due June 2022 fell one basis point, or 0.01 percentage point, to 8.22 percent in Mumbai, according to the central bank’s trading system.

Bank lending in India increased at an average annual pace of 17.3 percent so far this year, compared with 20.4 percent in the whole of 2011, central bank data show.

The Reserve Bank of India kept the repurchase rate unchanged at 8 percent at a policy review on July 31 and cut its economic-growth forecast for the year through March 2013 to 6.5 percent from 7.3 percent.

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, was little changed at 7.76 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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