Bloomberg News

India’s Bonds Slump on Speculation RBI May Halt Debt Purchases

January 24, 2012

Jan. 24 (Bloomberg) -- India’s 10-year bonds fell the most in 26 months on speculation the central bank will halt buying government notes after reducing reserve requirements for banks to ease a cash squeeze.

Yields rose to a two-week high after Reserve Bank of India Governor Duvvuri Subbarao said it’s too “early to decide” whether the central bank will continue with debt purchases. The monetary authority has bought 719 billion rupees ($14.4 billion) of sovereign notes, since resuming securities purchases in November. The RBI reduced the cash reserve ratio to 5.5 percent from 6 percent today. That would add about 320 billion rupees to the banking system, according to the monetary authority.

“The fear among investors is that the open market auctions will be stopped as the CRR reduction will inject liquidity,” said J. Moses Harding, executive vice president at IndusInd Bank Ltd. in Mumbai. “Debt sales by the finance ministry are also a worry.”

The yield on the 8.79 percent bonds due November 2021 rose 20 basis points, or 0.20 percentage point, to 8.37 percent in Mumbai, according to the central bank’s trading system. That is the biggest advance for a benchmark 10-year bond since Nov. 30, 2009.

A reserve ratio cut was predicted by three of 21 economists in a Bloomberg News survey, while the rest forecast no change. The RBI held its repurchase rate unchanged at 8.5 percent today.

Record Borrowing

India boosted its annual debt-sales target by 8.5 percent last month to a record 5.1 trillion rupees.

“We will see how the CRR cut rolls out, we will look at the borrowing program and only if necessary we will do open market operations,” Subbarao said in a briefing to reporters. The objective of buying bonds was not to target debt yields and such purchases were driven by a cash crunch, his deputy Subir Gokarn said.

Lenders borrowed an average 1.1 trillion rupees a day from the central bank to meet shortages in the past three months, up from 461 billion rupees in the prior period, official data show.

The reserve ratio decision aims to “address structural pressures on liquidity in a way” consistent with the prevailing monetary stance, the RBI said. The persistence of “tight liquidity conditions” could disrupt the flow of credit and further exacerbate growth risks, it said.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, rose seven basis points to 8.03 percent, according to data compiled by Bloomberg.

--With assistance from Manish Modi in New Delhi and Anoop Agrawal in Mumbai. Editors: Abhay Singh, Sam Nagarajan

To contact the reporter on this story: V. Ramakrishnan in Mumbai at

To contact the editor responsible for this story: James Regan at

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