Bond prices gain after govt cuts debt auction size

Bonds rose for a second day after the government reduced the size of debt auctions scheduled for this week by Rs 3,000 crore ($645 million), which may help ease a cash shortage.

The yield on the 7.80% note due May 2020 dropped two basis points to 7.57% at the close of trade on Tuesday. The rate earlier fell as much as six basis points to touch its lowest level since June 10. The price rose 0.15, or 15 paise per Rs 100 face amount, to 101.56.

Yields fell after Pronab Sen, chief statistician of India, said on Tuesday RBI may not raise interest rates immediately because of a cash crunch in the economy. The finance ministry said on Monday it will sell Rs 10,000 crore of notes maturing in seven, 12 and 30 years on July 2.

“The cut in the size of bond sales is a signal that policy makers are ready to tackle any problem on the liquidity front,” said Srinivasa Raghavan, head of fixed-income at IDBI Gilts in Mumbai.

The government had indicated it may borrow Rs 13,000 crore between June 28 and July 2 in its debt-sale calendar published on March 29.

The central bank’s next policy meeting is scheduled for July 27. The bank last raised interest rates at its April 20 policy meeting, the second increase this year. Its benchmark reverse repurchase rate is 3.75% and the repurchase rate is 5.25%. The benchmark wholesale-price index advanced 10.16% from a year earlier in May, approaching the fastest pace in 17 months, after a 9.59% gain the previous month.

The cost of one-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, decreased. The rate, a fixed payment made to receive floating rates, was 5.53%, compared with 5.57% on Monday.