Indian 10-Year Bonds Fall as Cash Shortage at Banks Damps Demand

India’s 10-year bonds declined, snapping a two-day advance, on speculation a cash squeeze in the banking system will damp demand.

Local lenders borrowed an average 931 billion rupees ($17 billion) a day from the Reserve Bank of India this month to meet shortages, compared with 671 billion rupees in October, official data show. The central bank, which has bought 820 billion rupees of debt since April 1 to boost the availability of funds, last held an auction to purchase securities in June. Cash at banks may decline further as companies pay quarterly taxes by Dec. 15, according to Quantum Asset Management Co.

“Yields have risen as some investors probably expected the central bank to resume debt purchases this week to boost liquidity and they are disappointed,” said Arvind Chari, a senior fund manager at Quantum Asset in Mumbai. “Liquidity is going to worsen in the coming days as corporates pay taxes.”

The yield on the 8.15 percent government notes due June 2022 rose two basis points, or 0.02 percentage point, to 8.21 percent in Mumbai, according to the central bank’s trading system. Local markets were closed yesterday for a public holiday.

Tax payments may drain between 500 billion rupees to 650 billion rupees from the financial system, Chari said.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, fell one basis point to 7.74 percent, data compiled by Bloomberg show.

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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