Feb. 1 (Bloomberg) -- India’s 10-year bonds gained, pushing yields to the lowest level in almost nine months, on optimism debt purchases by the central bank will ease a cash squeeze.
The Reserve Bank of India will buy as much as 100 billion rupees ($2 billion) of fixed-income securities on Feb. 3, it said in a statement yesterday. The monetary authority, which has bought 719 billion rupees of notes since November, refrained from purchasing debt in open-market operations last week. The finance ministry has a target to borrow a record 5.1 trillion rupees in the fiscal year ending March 31.
“Bond purchases will help mitigate the liquidity crunch and reduce pressure from heavy debt sales,” said Anoop Verma, a fixed-income trader at Development Credit Bank in Mumbai. “The open-market operations may help soften yields further.”
The rate on the 8.79 percent notes due November 2021 fell 13 basis points, or 0.13 percentage point, to 8.15 percent in Mumbai, according to the central bank’s trading system. That’s the lowest level for a benchmark 10-year bond since May 2, according to data compiled by Bloomberg.
The yield, which has declined 42 basis points this year, may touch 8 percent before the budget in March, Verma said.
Last week, the RBI cut the cash-reserve ratio by 50 basis points to 5.5 percent, the first time since 2009, to boost the availability of funds in the banking system. The next review is scheduled for March 15. Another reduction is “always on the table,” central bank Deputy Governor Subir Gokarn said yesterday. “We will consider the cash-reserve ratio cut, if it does happen, only in the mid-quarter review.”
The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, fell two basis points to 8.14 percent, according to data compiled by Bloomberg.
Lenders borrowed an average 1.1 trillion rupees a day from the central bank to meet shortages in the past three months, up from 515 billion rupees in the prior period, official data show.
Cash conditions will continue to be tight as the widening trade deficit may exert pressure on the rupee, prompting the central bank to sell dollars, said Mahendra Jajoo, the Mumbai-based head of fixed income at Pramerica Asset Managers, a unit of Newark, New Jersey-based Prudential Financial Inc.
India’s trade deficit was $12.7 billion in December, compared with $8.07 billion a year earlier, the commerce ministry said in an e-mailed statement today. The shortfall for April to December was $133.27 billion, compared with $96.21 billion in the same period in 2010.
“The trade-deficit problem isn’t going to go away anytime soon,” Jajoo said. “The rupee will have a tendency to weaken unless you see a significant improvement in capital flows.”
The rupee fell 16 percent in 2011, the worst performance among Asia’s 10 most-traded currencies. It has rebounded 7.7 percent this year, the most in the region. Overseas investors boosted holdings of local debt by $3.2 billion as of Jan. 30, and investment in stocks rose $2.1 billion, according to the Securities & Exchange Board of India.
Jajoo predicts the RBI may cut the cash-reserve ratio again before the March policy review.
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