India’s 10-year government bonds capped their worst monthly performance since November on concern a decline in the central bank’s debt purchases will lower demand for the securities.
The yield on the 8.83 percent sovereign notes due November 2023 jumped nine basis points, or 0.09 percentage point, this month to 8.86 percent in Mumbai, according to the central bank’s trading system. Yields have climbed also on speculation quarterly corporate tax payments due in March will drain cash from the financial system. One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell three basis points to 8.68 percent, data compiled by Bloomberg show.
India sold 100 billion rupees ($1.6 billion) of debt on Feb. 7 at the final auction for the year through March. The Reserve Bank of India will inject funds through additional repurchase-contract auctions to help offset the tax payments, it said in a Feb. 18 statement.
“The central bank has absorbed about 20 to 25 percent of the government’s debt issuance in the past two years, but that may not continue,” Dwijendra Srivastava, head of fixed income at Sundaram Asset Management Co., said by phone. “The RBI is clearly showing a preference for term-repo auctions to inject cash instead of open-market purchases of long bonds.”
Inflation remains the biggest threat to the economy, and any rate action will depend on data, RBI Governor Raghuram Rajan, who has raised borrowing costs three times since taking office in September, said on Feb. 23 in Sydney.
The South Asian economy grew 4.7 percent from a year earlier in the October-December quarter, data released today after the close of markets showed.
Rajan last lifted the benchmark repurchase rate to 8 percent from 7.75 percent on Jan. 28. Wholesale prices rose 5.05 percent in January from a year ago, the least since May, and the consumer-price index increased 8.79 percent, the smallest gain in two years. The decelerating trend in the wholesale-price index may not last, according to Standard Chartered Plc.
The WPI’s slowing is due mainly to a decrease in vegetable prices, Anubhuti Sahay, a Mumbai-based economist at Standard Chartered, said in a Feb. 14 interview. “Once the reduction in vegetable prices reverses, the move up in inflation can be very sharp,” she said.
Finance Minister Palaniappan Chidambaram last week announced gross borrowing of 5.97 trillion rupees for the year starting April 1 from a revised 5.64 trillion rupees for the current period. Net borrowing for next year is estimated at 4.57 trillion rupees.
“Many investors are sitting on the sidelines before debt supply picks up in the next fiscal year,” Prasanna Patankar, senior vice president at STCI Primary Dealer Ltd. in Mumbai, said in a phone interview on Feb. 26. “There’s very little demand.”