MUMBAI: Indian government bonds, including the new 10-year debt, gained for a second consecutive session on Tuesday, supported by improved cash conditions and early gains in the rupee.
Cash in the banking system has improved on month-end government spending and state-run oil refiners selling rupees to buy dollars in the forex market.
This has led to lower borrowing from the central bank's emergency funding window, or Marginal Standing Facility, where banks borrow at the penal rate of 8.75 percent, 100 bps above the repo rate.
Despite selling from oil companies, the rupee gained as much as 62.28 to the dollar on foreign fund inflows with a few corporates, helping further ease bond yields. It however ended flat on the day at 62.50/51 to the dollar.
"Better liquidity would lead to positive carry on bonds as overnight rates move below the MSF rate," said Arvind Chari, head, fixed income and alternatives at Quantum Advisors.
Activity in the bond market has largely been around the newly issued 10-year bond, which was issued on Friday. Its yield eased 1 bp to 8.74 on Tuesday, retreating further from its cut-off yield of 8.83 percent at the auction.
The existing 10-year benchmark bond yield ended 5 basis points down at 9.04 percent.
Traders are awaiting India's 140 billion rupees auction of government bonds on Friday as well as July-September economic growth data and October fiscal deficit data also due on Friday.
In the overnight indexed swap market, the benchmark five-year swap rate closed 2 bps lower at 8.43 percent, while the one-year rate was down 2 bps at 8.54 percent.
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