Indian Bonds Fall As Cash Crunch Worsens At Banks; Rupee Drops

MUMBAI (Dow Jones)--Indian sovereign bond prices fell Thursday as a cash shortage in the banking system worsened, and due to concerns that a recent spike in global crude oil prices will bring another wave of inflationary pressures.

The benchmark 8.79% 2021 bond ended at INR103.62, compared with Wednesday's close of INR103.88.

Indian banks have borrowed between INR1.80 trillion and INR1.92 trillion everyday in the past three sessions from the central bank at 8.5%, underlining the severity of the liquidity crunch.

Market watchers fear threats also from crude oil prices.

"We remain watchful of a new round of price pressures" from higher oil prices and consumption, Daiwa Capital Markets said in a report.

The house said it is hopeful that weak economic growth--gross domestic product expanded at its slowest pace in more than two years during the October-December quarter--may give the central bank a reason to cut its key policy rate later this month.

But, a relapse of headline inflation above 7% "could easily upset our forecast," it said.

Inflation in India slowed to 6.55% year-on-year in January from 7.47% in the previous month.

Meanwhile, traders are keenly awaiting an up to INR120 billion bond buyback Friday for further cues.

The buyback is aimed at easing the liquidity crunch as the cash shortage persisted despite the central bank in January lowering banks' cash reserve requirement to 5.5% from 6.0%.

In the currency market, the Indian rupee fell against the U.S. dollar Thursday, weighed by weak local stocks and tracking global markets where the greenback strengthened.

The dollar was at 49.21 in late trade, compared with INR49.00 late Wednesday.

The dollar gained against the euro and the Japanese yen after Federal Reserve Chairman Ben Bernanke acknowledged improvements in the U.S. economy, leading some investors to scale back expectations for more monetary easing.

Among local factors, weak trade data also raised concern for the Indian currency.

India's trade deficit in January widened to $14.8 billion from $10.3 billion a year earlier as export growth slowed due to falling global demand. Imports, oil as well as non-oil, continued to grow.

The Bombay Stock Exchange's Sensitive Index fell 1.0% to close at 17,583.97.