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India’s 10-Year Bonds Complete Weekly Decline on Cash Squeeze

Indian 10-year government bonds completed a weekly decline on speculation declining levels of cash in the banking system will damp demand for the notes.

Lenders borrowed an average 905 billion rupees ($16 billion) a day from the central bank this month to meet shortages, compared with 671 billion rupees in October, official data show. The Reserve Bank of India, which has purchased 820 billion rupees of debt since April 1 to boost the availability of funds, halted open-market buying in June.

“Tight liquidity is depressing appetite for bonds,” said Debendra Kumar Dash, a fixed-income trader at Development Credit Bank Ltd. in Mumbai. “Some investors expect the central bank will resume debt purchases to inject cash but so far that hasn’t materialized.”

The yield on the 8.15 percent government notes due June 2022 rose four basis points, or 0.04 percentage point, this week to 8.23 percent in Mumbai, according to the central bank’s trading system. The rate was little changed today.

The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.77 percent today, data compiled by Bloomberg show. The rate rose four basis points this week.

Increased withdrawal of cash during the festival season and slower government spending led to the cash squeeze, according to Nomura Holdings Inc. Hindus celebrated a string of festivals in the past two months, including Diwali on Nov. 13.

The Indian government had a cash balance of more than 700 billion rupees yesterday, two finance ministry officials with direct knowledge of the matter said, indicating the government is holding back spending.

Open-market operations aimed at easing the squeeze will be determined by the Reserve Bank of India, the officials said, asking not to be identified citing rules.

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