Bonds recover on hopes of govt steps to reduce deficit

Government bonds recovered all losses to end flat on Tuesday on speculation the government will take more steps to narrow the country's current account deficit after the rupee hit a record low.

Bonds dealers also welcomed the appointment of Raghuram Rajan as the next RBI governor as he is broadly viewed as somebody who is reform-minded and can bring a fresh approach to monetary policy.

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Rajan's appointment comes as bond yields have surged after the Reserve Bank of India unveiled measures last month to drain cash in a bid to prop up the rupee, effectively putting on hold a policy geared towards easing.

"Bonds fell because of persistent weakness in the currency, but recovered a bit on reports that some measures to support the rupee are imminent," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership.

The benchmark 10-year bond yield ended flat on the day at 8.20 percent after earlier rising to as much as 8.30 percent. Total volumes were less than normal at Rs 152.45 billion.

Yields rose earlier in the day after the rupee slumped to a record low of 61.80, raising expectations that the central bank would unveil new cash-draining measures, especially since signs of increased government spending have kept liquidity easy.

Bonds recovered on media reports that the government would be soon take steps to reduce the current account deficit, including a possible sale of debt, which would ease pressure on the RBI in defence of the rupee.

Dealers say that in the absence of any new government measures, the central bank could take more steps such as further capping banks' borrowing or even raising the cash reserve ratio.

Yields have risen for eight successive weeks, surging 65 basis points (bps) since the RBI first announced cash tightening steps on July 15.

The benchmark 5-year overnight indexed swap rate closed up 5 bps at 8.39 percent. The 1-year rate ended up 10 bps at 9.21 percent.