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Indian bond yields at February low on cash supply optimism

LiveMint logoLiveMint 22-05-2014 Shikhar Balwani

Mumbai: India’s 10-year bonds rose, pulling yields to the lowest since February, on speculation demand for debt will rise as the central bank buys dollars to boost forex reserves, increasing cash supply in the banking system.

India’s foreign-exchange reserves have risen by $39 billion from a three-year low in September to $314 billion this month, official figures show. The overnight inter-bank rate has slid to 7.10% from as high as 12.5% earlier this month. Local lenders’ overnight borrowings from the Reserve Bank of India (RBI) to meet cash shortages fell this month to an average of `89 crore, from `12,300 crore in April, signalling an increase in funds availability.

The yield on the 8.83% notes due November 2023 declined for a third day, falling six basis points, or 0.06 percentage point, to 8.71% in Mumbai, prices from the RBI’s trading system show. The rate, which slid nine basis points in the previous two days, is at its least since 10 February.

“Net dollar purchases by RBI, which is one of the key drivers of liquidity easing in India, could move banking system liquidity from deficit into surplus,” Barclays Plc analysts Rohit Arora and James Lee wrote in a note dated Wednesday.

“The overnight call fixing premium over the repo rate could move from positive to negative, which should restore confidence in the fixed-income markets.”

The RBI’s key repurchase rate is set at 8% currently.

One-year interest-rate swaps, derivative contracts used to guard against swings in funding costs, fell three basis points to 8.43%, the lowest close since 24 January, data compiled by Bloomberg show.

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