Indian bonds fall to 3-week lows as supply fears haunt

Last Updated: Fri, Mar 01, 2013 12:00 hrs

* 10-year yield rises 4 bps to 7.91 pct

* Fitch analyst says bias still towards ratings downgrade - report

* Dec qtr GDP growth slows further, expands at 4.5 pct

* RBI buys 96.79 bln rupees out of 100 bln rupees through OMO

By Subhadip Sircar

MUMBAI, March 1 (Reuters) - Indian government bonds fell to three-week lows on Friday, extending losses a day after the finance minister unveiled a higher-than-expected gross borrowing for 2013/14, with comments from a rating agency adding to fears that a downgrade possibility was still real.

Yields have risen 11 basis points (bps) since the government said it plans to borrow 6.29 trillion rupees ($116 billion) in the fiscal year starting April, higher than the 5.58 trillion rupees for the current fiscal year.

The government has subsequently tried to assuage fears, with sources telling Reuters that the bond buyback of 500 billion rupees will not be included in the borrowing calendar and to that effect the gross borrowing is 5.79 trillion rupees.

The jitters over the borrowing numbers wiped out earlier gains after economic growth data showed December quarter GDP eased to 4.5 percent, a worse-than-expected reading.

"The key driver has been the announcement of higher gross borrowing than expected in the budget. This has been due to the buyback of 500 billion rupees and the associated uncertainty on when and how it's going to be funded," said Arvind Chari, fund manager at Quantum Asset Management.

The losses were accentuated by comments from a Fitch analyst that a rating downgrade possibility was still very real.

"The reality is it (credit rating) is on negative outlook - so that bias suggests it's more than likely we will downgrade - that says it all," Art Woo, director, sovereign ratings at Fitch Ratings told CNBC Asia.

The comments added to the selloff despite Fitch earlier saying the budget would not impact India's ratings.

Dealers also said the bond market was concerned that the government would buy back shorter paper and sell longer papers.

The benchmark 10-year bond yield ended 4 bps higher at 7.91 percent. It rose to 7.92 percent in session, a level last seen on Feb. 6.

It fell to 7.84 percent early in the session following the GDP data, released post-trading hours on Thursday.

Yields rose 11 bps in the week, their biggest weekly rise in nearly seven months and snapping three weeks of falls.

The RBI bought 96.79 billion rupees of bonds via open market operations, out of the 100 billion rupees scheduled.

Interest rate swaps were ranged, with the five-year OIS flat at 7.22 percent, while the near-end one-year OIS was down 1 bp at 7.61 percent. (Editing by Prateek Chatterjee)

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