Mumbai: Benchmark bonds rallied the most in more than three years, the biggest fluctuation of any government debt market on Tuesday, as the central bank kept interest rates unchanged and said growth prospects stand “trimmed”.

Ten-year yields fell to the lowest level in almost three weeks on optimism the Reserve Bank of India will use tools other than interest rates to cool inflation from near a 3 12-year high. Governor Yaga Venugopal Reddy told lenders for a second time in two weeks to set aside more money in reserves as a proportion of their deposits to curb growth in money supply.

“The uncertainty in the debt market is over for the time being and there’s comfort that there was no more preemptive action taken by the central bank,” said S Ananthanarayan, chief bond trader at Kotak Mahindra Bank Ltd, a primary dealer that underwrites government debt sales.

The yield on the benchmark 8.24% bond due 2018 declined 20 basis points, the most since December 2, 2004, to 7.94% at the 5:30 pm close in Mumbai, according to data compiled by Bloomberg. The price climbed Rs 1.34 per Rs 100 face amount, to Rs 102.04.

Policy makers raised the socalled cash reserve ratio instead to 8.25% from 8% starting May 24.

Wholesale prices rose 7.41% in the last week of March from a year earlier, the most since November 2004, according to government data. Price gains eased to 7.33% in the week ended April 12.

Growth may slow to between 8% and 8.5% in the fiscal year through March, the central bank said, from an average 8.7% in the past five years, a record. Inflation may slow to 5.5% by the end of March, the Reserve Bank forecast.

Yields on the benchmark notes have retreated from a 10-month high after India banned exports of rice and edible oil, cut import duty on wheat and subsidized sale of fuel to temper prices.

The benchmark yield may decline to 7.70% by year-end, according to the median estimate in a Bloomberg survey of analysts, with the most recent forecasts given the heaviest weightings.

The rally in government debt may not last long, said K Ramanathan, who manages the equivalent of $2.2 billion in Indian debt in Mumbai at ING Investment Management Pvt, as auctions and more measures to curb money supply growth reduce demand for the securities.

“The rally is just a knee-jerk reaction,” he said. “It’s not that all is well. You could see yields inching up with heavy debt auctions next month.”

The government plans to borrow Rs 30,000 crore next month, taking the total in April and May to Rs 50,000 crore, the most for such a period, according to the debt-sale calendar.

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Source : DNA