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Corporate tax woes hit bonds
March, 08th 2007
Bonds dropped on speculation corporate tax payments will drain cash from the banking system, leaving lenders with less spare funds to buy debt. 
Ten-year yields rose as local companies prepared to pay their fourth quarterly instalment of taxes for the current financial year by March 15. 
Bonds also declined on concern a 12 per cent drop in the nations key stock index in the past month will spur an outflow of overseas capital, further reducing the funds held by banks, the biggest buyers of government securities. 
Within a week from now we will see a major outflow of money from the system as companies pay their advance taxes, said K P Suresh Prabhu, chief of fixed income at HDFC Bank in Mumbai. The pressure on liquidity will drive bond yields higher. Also, the recent stock decline is raising concern that hedge funds may pull money out of the country. 
The yield on the benchmark 8.07 per cent note due January 2017 rose 1 basis point, or 0.01 percentage, to 7.96 per cent as of the 5:30 pm close in Mumbai, according to data compiled by Bloomberg. The price fell 0.06, or 6 paise to Rs 100.75. 
Bond yields move inversely to prices. Companies may pay as much as Rs 40,000 crore in quarterly tax by March 15, compared with the Rs 28,000 crore they are estimated to have paid in December, according to a Bloomberg News survey. 
The drop in bonds was tempered by speculation a decline in money market rates this week will make it easier for banks to buy the securities with borrowed funds. 
The drop in the call rate is helping bonds, said Piyush Wadhwa, a trader in Mumbai at ICICI Securities, a primary dealer that underwrites government debt auctions. The market should stabilise around these levels unless the central bank announces more bond sales. 
Overnight loan rates in the money market fell to the lowest since November 2005 yesterday after the central bank capped daily investment by banks in its reverse repurchase auctions at one-eighth of the average amount they spent in a day at such sales the previous week. The limit, which took effect March 5, spurred banks with spare cash to lend more in the money market, reducing borrowing costs. 
The rate banks charge each other on overnight loans was 5.45 per cent today, compared with 6 per cent a week ago, according to data compiled by Bloomberg. 
It declined to 5.2 per cent yesterday, the lowest since November 26, 2005. 
The cost of Indias interest-rate swaps, derivative contracts used to guard against the risk of an increase in rupee-based rates, declined. The five-year swap rate fell 3 basis points to 7.9 per cent.
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