WSJ: Indian Bonds Close Lower On Tight Liquidity; Rupee Falls
MUMBAI (Dow Jones)--Indian government bonds slipped Wednesday as strained liquidity conditions in the banking system continued to weigh on demand for sovereign paper.
The most-traded 8.13% 2022 bond ended at INR100.45, lower than Tuesday's INR100.59 finish. The benchmark 7.80% 2020 bond closed at INR98.48, compared with INR98.75 at its previous close.
The losses came as banks borrowed over INR1 trillion from just the first of the central bank's two liquidity auction windows. Many traders remain wary of buying bonds as they view the liquidity condition as a result of a mismatch between deposit and credit growth.
However, some argue that bond yields may fall as the absence of any bond sales this week may help blunt the impact of tight liquidity.
"In the medium term, we expect yields to move lower on the back of improving demand-supply dynamics and a moderation in inflation," and a possible signal from the Reserve Bank of India on a pause in the rate-hiking cycle, ICICI bank said in a report.
Besides, some traders expect the central bank to step in to help ease the cash crunch. Until that is done, bonds may remain under pressure as supply is set to resume next week.
Another key cue for bonds is the auction for individual limits to foreign funds for investing in local debt, which, a senior finance ministry official told Dow Jones Newswires, would be announced before Nov. 30.
In September, India said it will double the total foreign investment limit in government bonds to $10 billion and raise the cap in corporate bonds by $5 billion to $20 billion.
The auction is the next stage of a recent move to allow overseas investors to hold more bonds, a step that would add much-needed liquidity to the bond market. Another delay in the auction could spark a fresh sell-off of bonds.
In the currency market, the Indian rupee fell to a two-month low against the U.S. dollar as investors sold riskier currencies on Europe's sovereign debt woes.
The dollar was at INR45.70 late Wednesday, compared with INR45.57 late Tuesday. The greenback touched a more than two-month high of INR45.83 mid-session, surpassing INR45.82 of Sept. 20.
Weak local stocks also weighed on the local unit--the Bombay Stock Exchange's benchmark Sensitive Index lost 1.4% to end at 19,459.85.
"The rupee is likely to continue to fall against the dollar, as risky currencies face increased selling pressure, tracking the euro's movement against the dollar," said a trading head at a foreign bank. He expects the pair may test INR46.20 this week.
