UPDATE 1-Indian bond yields rise, swaps surge on deficit concerns

Wed Jan 30, 2013 5:35pm IST

Related Topics

* India's 10-yr bond yield ends at 7.89 pct, 4 bps higher

* India 5-year OIS at 7-mth high

* Brent crude rises to a more-than 3 month high

* RBI chief says future rate cuts will also be driven by current account gap (Updates with details on 5-year OIS)

By Subhadip Sircar

MUMBAI, Jan 30 (Reuters) - Indian government bond yields rose and rate swaps spiked on Wednesday as a surge in global crude oil prices reignited concerns about inflation and the bloated current account deficit, at a time when investors are wary about future rate cuts by the central bank.

The 5-year OIS swap rose 8 basis points to a near seven-month high late in the day after Reserve Bank of India chief Duvvuri Subbarao said on Wednesday future rate cuts will be driven not only by the inflation trend, but also the current account deficit, reiterating comments made a day earlier.

The central bank on Tuesday lowered the repo rate by 25 basis points, but dashed hopes of a sustained rate-easing cycle with a cautious statement. Meanwhile, the RBI's cut in the cash reserve ratio reduced the prospect of its bond purchases via open market operations.

The RBI's stance has stalled a rally in bond markets, which started late last month, with investors worried about the prospect that large bond supplies will resume in February after the government reduced issuance this month to curb the fiscal deficit.

"Fresh supply is again starting and the CRR cut has reduced OMO hopes. However, with limited supply this fiscal year, I expect 7.90 percent to be toppish for yields," said Ashish Parthasarthy, treasurer at HDFC Bank.

The 10-year benchmark bond yield ended at 7.89 percent, up 4 basis points (bps) from its Tuesday's close and snapping two sessions of falls.

Brent crude edged up to a more than three-month high of $114.57 per barrel on Wednesday, buoyed by optimism about the U.S. economy after data from the world's largest oil consumer showed a recovery was gaining ground.

Crude oil comprises two-thirds of India's imports and a rise in crude prices will add to the import bill and stoke inflation.

India is buffeted by twin deficits on the fiscal side and current account, making it dependent on volatile capital inflows to finance the deficit.

Dealers are now looking at Friday's auction when the government will sell 120 billion rupees of bonds, resuming its auction schedule after a week's gap.

February will see large supplies of debt totalling 480 billion rupees after only one auction in January.

Interest rate swaps also rose as dealers scaled back their rate cut expectations. The 5-year OIS rate gained 8 bps to 7.25 percent, its highest since early July.

The 1-year overnight index swap (OIS) rate rose 5 bps to 7.62 percent, its highest in a month. (Editing by Prateek Chatterjee)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Earnings Season

Earnings Season

Reliance Q4 sales rise, refining margin narrows.  Read 

Innovative Solution

Innovative Solution

Turning smog into jewels - a Dutch designer's solution to Beijing's pollution.  Video 

Insider Trading

Insider Trading

Rajaratnam's brother loses bid to dismiss insider trading charges.  Full Article 

Literary Giant Dies

Literary Giant Dies

Mourning and memories in Gabriel Garcia Marquez's languid hometown.  Full Article 

S&P on India

S&P on India

S&P: India's ratings to depend on next govt econ, fiscal policies.  Full Article 

Ambitious Aim

Ambitious Aim

In green car race, Toyota adds muscle with fuel-cell launch.  Full Article 

Bond Market

Bond Market

A star abroad, RBI boss riles bond traders at home  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage