Mumbai: Investors should buy Indian government bonds due between five and seven years because there will be relatively less supply of the securities than shorter-dated debt, Merrill Lynch & Co says.

Buyers should refrain from purchasing bonds due in less than five years as the government may issue more of those notes to drain cash from the banking system to damp inflation, said Ashish Agrawal, a fixed-income strategist at Merrill Lynch in Hong Kong.

The central bank may also increase the cash reserve ratio for a third time this year, which will push up shorterdated yields, he said.

“The segment should be least vulnerable,’’ Agrawal said via telephone on Thursday.

“The short-maturity bonds will be vulnerable to interest-rate risks, if there are any, while the longer ones will be pressured by the large supply.’’

The yield on the government’s 7.38% due 2015 has fallen 21 basis points since April 29 when the RBI raised CRR.

India may also increase supply of debt due in 10 years or longer by issuing a greaterthan-expected amount of oil bonds, Agrawal said.

That would also push longer-dated bond yields higher, he said.

Source : DNA