By Subhadip Sircar
MUMBAI, Dec 31 (Reuters) - India's benchmark 10-year bond
yield fell to an over 20-month low on Monday on quarter-end
buying and as the government's move to sell more treasury bills
was seen as reducing the need to sell longer-dated paper.
The 10-year yield fell for the first time in four years in
2012 after retreating 51 basis points, helped largely by the
central bank's steep cuts in the cash reserve ratio and its bond
purchases in open market operations.
Bond prices are likely to extend gains next year as the
Reserve Bank of India is widely expected to cut interest rates
as early as January, although investors will also scrutinise the
government's spending ahead of general elections in 2014.
'How much of repo cut is possible is difficult to say, but
surely we would see rally in bonds. The scope of repo cut
depends on how inflation plays out,' said Aniruddha Iyer,
assistant vice president at Quant Capital.
The 10-year benchmark bond yield fell as much as
10 basis points to 8.01 percent from Friday's close, hitting a
level last seen in mid-April 2011, as per Reuters data. It
closed at 8.05 percent, its biggest single day percentage fall
since early August.
The RBI has held interest rates steady since its 50 basis
point cut in April, although it has cut the CRR by 175 bps and
bought bonds to reduce a persistent cash deficit in 2012.
Investors were comforted by the government's plans to sell
1.4 trillion rupees ($25.5 billion) of treasury bills in the
January-March quarter, which dealers said works out to a net
borrowing of 160 billion rupees.
Investors had feared the government would borrow in
longer-dated paper as part of any move to borrow more than its
planned 5.7 trillion rupees of bonds in the current fiscal year
to meet its fiscal deficit target of 5.3 percent of GDP.
India's fiscal deficit for the April-November
period reached 80.4 percent of the budgeted full fiscal year
target, government data showed on Monday, compared to 85.6
percent in the same period in fiscal 2011/12.
The immediate trigger for the markets in 2013 will be
whether the central bank delivers a rate cut at its Jan. 29
policy meet after saying this month its focus is shifting to
The government has also raised the foreign fund limit for
investment in government bonds by $5 billion, another positive
trigger for bonds.
However, any rally could be capped should the government
announce a spending-heavy populist package for fiscal 2013/14,
which would raise worries of a surge in borrowing and of a
potential downgrade in the country's sovereign ratings.
For a snapshot of top 5 themes for 2013 in debt, see
India's short-end 1-year rate and the
long-end 5-year OIS rate were down 2 basis points
each at 7.60 percent and 7.12 percent, respectively.
The 1-year rate was down 15 basis points in 2012, while the
5-year paper was up 4 basis points.
(Editing by Rafael Nam and Sunil Nair)
Keywords: MARKETS INDIA BONDS/
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