Government bonds fell on Monday as last weeks tax outflow drained funds from the banking system.
Indian companies may have paid as much as Rs30,000 crore ($7.4 billion) as the second instalment of their advance taxes, according to Suresh Pai, chief of fixed income at state- owned Canara Bank Ltd.
The tax deadline was 15 September. Bonds also fell as lending rates between banks rose to the highest in a month, discouraging the purchase of debt with borrowed funds.
We wont see the kind of cash surpluses that we have witnessed in the recent past, Mumbai-based Pai said. There are more reasons for yields to rise than fall.
The yield on the 7.99% note maturing July 2017 held at 7.86% at the close in Mumbai, according to the trading system of the Reserve Bank of India (RBI). The price fell 0.575, or 6 paise per Rs100 face amount, to Rs100.83. Yields move opposite to prices.
Overnight borrowing rates rose to as much as 7.05% on Mondaythe most this monthsuggesting surplus funds at banks have declined. The rate has averaged 6.51% the past year.
RBI drained on average Rs21,120 crore through daily sales of securities last week, compared with Rs34,850 crore in the previous week. That suggests a drop in surplus cash in the system.
The central bank had said it will sell only short-term treasury bills.
RBI issued Rs10,000 crore of bills this month to prevent surplus funds from stoking inflation.