Bonds complete biggest monthly loss since July

The 10-year bonds completed their worst month since July as investors brace for a possible sixth interest-rate increase by the RBI this year. Yields touched a two-year high this month, as a cash shortage at banks pushed up overnight rates, making it more expensive to buy debt with borrowed funds.

Lenders borrowed an average of Rs 60,300 crore a day from the central bank’s repur-chase auction window in October, compared with an average of Rs 25,080 crore a day in September, according to data compiled by Bloomberg.

“One more round of interest-rate increase is in the offing next week,” said Krishnamurthy Harihar, treasurer at FirstRand in Mumbai. “Persistently tight liquidity is also keeping the yields higher.”

The yield on the 7.8% note due May 2020 rose 26 basis points this month to 8.11% at close in Mumbai, said the RBI’s trading system. The price fell 1.73, or Rs 1.73 per Rs 100 face amount, to 97.88.

The RBI may increase the repurchase auction rate, at which it lends to banks, for the sixth time this year, 15 of 23 economists said in a Bloomberg News survey before the policy review on November 2.

The central bank conducted a special repurchase auctions today to inject funds into the banking system to ease a cash shortage after the nation's record share offering by CIL drained money. It will also conduct the auction on Saturday and on November 1.