Indian bond yields flat

Indian bonds ended flat on Friday as investors switched to riskier assets after the country cut a tax on overseas borrowing by local companies, boosting confidence on the government's resolve to continue undertaking reforms. Finance Minister P. Chidambaram said the government will reduce the withholding tax on overseas borrowing by local companies, in a move expected to increase fundraising abroad.
The measure was widely interpreted as showing India's commitment to tackle long-awaited measures, sending the country's main two stock indexes up more than 2 percent each to their highest in 14 months. Bond investors are now keenly awaiting the government's second-half borrowing plans expected sometime next week amid widespread expectations India will breach its 5.1 percent fiscal deficit target for the fiscal year ending in March 2013.
"Bonds are sluggish as investor interest is focused more on risk markets, which are rallying incessantly on the back of reform measures," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership. "Market is wary of the auction calendar to be announced next week, fearing that there could be extra borrowing announcements," Bagla said.
The benchmark 10-year bond yield ended flat at 8.165 percent and fell 2 basis points for the week. Bond yields touched as low as 8.10 percent a week ago, its lowest levels since late July, but has steadily risen after the Reserve Bank of India disappointed on Monday by keeping interest rates on hold.
The central bank's action has taken the wind out of the positive reaction to a string government reforms amid some doubts about whether they'll be enough to prevent the country from overshooting its fiscal deficit target. The government is set to borrow 5.7 trillion rupees ($104.96 billion) in the current fiscal year, 65 percent of which is expected to be raised in the first half.
Traders expect bond yields to trade in a narrow 8.12-8.18 percent range until the borrowing calendar is announced. In the near-term, liquidity is expected to improve from Saturday with the injection of 170 billion rupees in the banking system after the RBI opted to cut the cash reserve ratio, or the amount of deposits lenders must keep with the RBI. The 1-year OIS rate ended unchanged at 7.70 percent, while the 5-year OIS unchanged at 7.15 percent.