India’s 10-year bonds declined on speculation a cash shortage in the banking system will lower appetite for debt.
Banks borrowed an average of 841 billion rupees ($18.5 billion) a day this quarter using the Reserve Bank of India’s repurchase auction window, compared with 239 billion rupees in the previous three-month period, according to data compiled by Bloomberg.
“There was selling in bonds on the view that money will stay tight,” said Paresh Nayar, head of currency and money markets at FirstRand Ltd. in Mumbai.
The yield on the 7.80 percent bonds due May 2020 climbed two basis points to 7.97 percent as of the 5 p.m. close in Mumbai, according to the central bank’s trading system. A basis point is 0.01 percentage point. The price fell 0.16, or 16 paise per 100 rupee face amount, to 98.87.
The Reserve Bank of India, which left borrowing costs unchanged at a policy review on Dec. 16, said that it would hold the first auction to buy back 120 billion rupees of notes this week. Indian companies have raised a record 1.1 trillion rupees from equity offerings this year, draining funds from the financial system. The central bank plans to repurchase 480 billion rupees of bonds over the next month.
“If government spending takes place, it will add to the liquidity,” said Roy Paul, Mumbai-based deputy general manager at Federal Bank Ltd.
The central bank cut the statutory liquidity ratio, or the proportion of deposits lenders must invest in government bonds, to 24 percent from 25 percent. The move took effect on Dec. 18.
The cost of one-year interest-rate swaps, the fixed payment made to receive a floating rate, rose four basis points to 6.85 percent.