Indian government bonds fell for a third straight session on Friday, sending yields to their biggest daily rise in over a week, on worries the central bank may need to take stronger measures to prop up the rupee stuck near record lows. Benchmark 10-year bond yields rose 12 basis points for the week. They have risen for eight consecutive weeks after heavy foreign selling and the Reserve Bank of India's steps to drain liquidity on July 15 and July 23.
Yet with the rupee threatening to break below a record low of 61.21 on July 8, investors fear the central bank could take more steps to drain cash, unless the government acts to bring in foreign inflows and help reduce concerns about India's record high current account deficit. Bond dealers also pared positions ahead of July US employment data which may provide more cues about how soon the Federal Reserve will dial back its bond purchases.
The benchmark 10-year bond yield jumped 21 basis points on the day to 8.28 percent, the highest daily rise since July 24. It traded in an 8.09-8.28 percent band. Bonds were also under pressure after a 150 billion rupee debt sale saw partial devolvements, while the cut-off yields came sharply higher than those predicted by a Reuters poll, reflecting lack of investor appetite. Uncertainty about the RBI's resolve is also weighing on debt markets after Governor Duvvuri Subbarao said on Tuesday the central bank would roll back recent cash tightening measures only after it determines stability has been restored in the foreign exchange market.
Demand for bonds languished with volumes at 109.45 billion rupees ($1.82 billion) against the average 400-500 billion rupees during the year. Near-end swap rates eased during the day on improved liquidity aided by government spending. The benchmark 5-year overnight indexed swap rate closed up 7 basis points at 8.44 percent, while the 1-year rate ended up 1 bp at 9.37 percent.
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