Indian 10-Year Bond Yield Rises to One-Month High on Cash Crunch

The yield on India’s benchmark bonds due 2022 rose to the highest level in a month on speculation a shortage of cash in the banking system will limit debt purchases.

Commercial lenders have borrowed an average of $1.04 trillion rupees ($20 billion) a day from the central bank last week, compared with $966 billion rupees in the preceding period. The Reserve Bank of India’s Jan. 29 guidance of “limited” room for interest-rate reductions is also causing yields to rise even after the policy rate was cut by 25 basis points, according to IndusInd Bank Ltd.

Cash shortages mean “the impact of policy action may not result in significant transmission to yields,” said J. Moses Harding, executive vice president at IndusInd in Mumbai. “Relief will be from reduced market borrowing from the government for the rest of the fiscal year through March 31 and possible support from the RBI through open-market debt purchases.”

The yield on the 8.15 percent bonds due June 2022 rose three basis points, or 0.03 percentage point, to 7.94 percent in Mumbai, according to the central bank’s trading system. The rate is the highest since Jan. 3.

The Reserve Bank of India may resume buying sovereign notes if the yield looks like rising past 7.95 percent, according to IndusInd Bank. The government has completed more than 90 percent of budgeted borrowings for the year ending March 31. Finance Minister Palaniappan Chidambaram said on Feb. 1 that the government is committed to fiscal targets and policies needed to take the economy back to a higher growth path.

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