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India’s 10-Year Bonds Drop for a Third Day on Cash Shortage

India’s 10-year bonds dropped for a third straight day, the longest losing streak in more than two weeks, on speculation investors will sell debt to overcome a cash shortage in the banking system.

Yields reached the highest level in more than a month as banks borrowed an average 1 trillion rupees ($21.9 billion) a day from the central bank’s repurchase auction window in November, compared with 522 billion rupees a day in October, according to data compiled by Bloomberg.

“Until the policy makers come up with some specific measures to address the liquidity deficit, bonds will remain subdued,’ said Ganti N. Murthy, head of fixed income at Peerless Mutual Fund in Mumbai.

The yield on the 7.80 percent note due May 2020 rose one basis point to 8.11 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system. The 10-year yield may touch 8.15 percent this week, Murthy said. The price fell 0.29, or 29 paise, per 100 rupee face amount to 97.96.

The liquidity situation in the country will ease by the end of this year, Chakravarthy Rangarajan, the prime minister’s chief economic adviser, said today.

The central bank may consider asking banks to hold less cash as statutory reserves should the squeeze prevail, a finance ministry official who didn’t want to be identified told reporters in New Delhi yesterday.

The cash reserve ratio, or the proportion of money banks must set aside to meet prudential guidelines, is 6 percent.

India’s inflation is still high, Reserve Bank of India Deputy Governor Subir Gokarn told reporters in New Delhi today.

Inflation slowed in October to the lowest level in nine months, after the central bank increased interest rates six times this year. The benchmark wholesale-price index rose 8.58 percent from a year earlier after an 8.62 percent increase in September, according to a commerce ministry statement in New Delhi today.

Fiscal Deficit

There’s no net addition to the fiscal deficit from the supplementary demand for grants approved by the lower house of parliament today, Finance Minister Pranab Mukherjee said today.

India’s budget deficit in the April to October period reached 42.6 percent of its target for the financial year that began April 1, according to a government statement today. The government aims to rein in the deficit within 5.5 percent of gross domestic product in the fiscal year that ends in March.

The cost of one-year interest-rate swaps, a fixed payment made to receive a floating rate, fell one basis point to 6.81 percent.

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