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Bonds extend gains on Jalan's rate comments

Indian government bonds extended their morning's rise slightly in noon deals on Monday reacting to Reserve Bank of India Governor Bimal Jalan's statements on interest rates and inflation.

Dealers said prices rose after Jalan told reporters in Delhi that the core inflation level was comfortable and the interest rate environment was positive.

"Core inflation at 3.4 percent is comfortable as of now...the interest rate environment is positive," Jalan told reporters on the sidelines of the bank economists' conference at New Delhi.

Prices of actively traded longer tenor bonds were up by around Rs 0.05-0.1 from the morning's levels.

The market has been slightly bullish in anticipation of a cut in the key bank rate, at which the RBI extends refinance, after the United States lowered rates earlier this month.

Dealers said Jalan had not categorically ruled out a rate cut and this was fuelling market optimism. His assurance on inflation was also a positive factor.

Inflation, measured by the wholesale price index, has been rising steadily over the past few months and grew 8.16 per cent year-on-year in the week ended December 30. The rise is mainly on account of the country's administered fuel prices being hiked twice so far in 2000-01 (April-March) coupled with a spurt in food prices, analysts say.

Earlier in the day, bond prices rose in anticipation of good response to Monday's gilts auction after the central bank set a lower underwriting commission, dealers said.

The Reserve Bank of India is auctioning Rs 25 billion of the 12.25 per cent government securities maturing in 2010 and Rs 15 billion worth of the 12.30 per cent 2016 stock, both on a price basis.

Dealers said the underwriting commission was set at Rs 0.05 for primary dealers for both the auctions compared to expectations of Rs 0.12-0.15. The lower commission suggested good demand.

Call money rates were firmer around 9.80-10.05 per cent ahead of outflows of up to Rs 40 billion towards Monday's bond auctions. Payments will be made on Tuesday. Rates closed Saturday at 9.75-10.0 per cent.

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