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India 10-Year Bonds Gain as Drop in Overnight Rate Spurs Demand

India’s 10-year bonds gained, ending a three-day decline, as overnight rates near the lowest level in a week stoked demand for debt.

Yields dropped from the highest level in more than a month as banks borrowed 493.25 billion rupees from the central bank’s repurchase auction window today, less than half of an average of 1 trillion rupees ($22 billion) each day in November, indicating the easing of cash conditions. The call money rate fell to 6.3 percent today from 6.75 percent on Nov. 29, the first day of this week.

“Liquidity seems to be easing although it remains to be seen whether there will be further improvement,” said Roy Paul, deputy general manager at Federal Bank Ltd. in Mumbai. “The bond price levels were also good, which provided an opportunity to invest.”

The yield on the 7.80 percent note due May 2020 fell two basis points to 8.09 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system. It touched 8.13 percent, the highest level since Oct. 28, earlier. The price added 0.16, or 16 paise per 100 rupee face amount, to 98.12.

Reserve Bank of India Deputy Governor Subir Gokarn signaled yesterday the central bank will refrain from cutting the cash-reserve ratio.

“The cash-reserve ratio clearly remains an option but we believe that our monetary stance is still anti-inflationary, we are still dealing with inflation,” Gokarn told reporters. “We don’t want to send any mixed signals about a change in the monetary stance.”

The proportion of cash banks must set aside as reserves is currently 6 percent.

India’s economic growth target for the financial year that ends March 31, 2011, maybe raised from the current 8.5 percent, Kaushik Basu, chief economic adviser in the Ministry of Finance, said in New Delhi today.

The cost of one-year interest-rate swaps , a fixed payment made to receive a floating rate, was little changed at 6.81 percent.

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