MUMBAI: Indian government bonds rose on Monday after data showed the economy grew faster than expected in the June quarter and on ample liquidity, but broader gains were capped by the reality that foreign institutional investors have almost exhausted their entire allocation of debt.
Analysts say positive news such as data showing India's economy grew a faster-than-expected 5.7 percent in the April-June quarter from a year earlier should help underpin sentiment for Asia's third largest economy.
Despite lingering concerns over Ukraine, hopes that the European Central Bank will announce more monetary stimulus at its policy meeting this week are also seen as positive for emerging market inflows.
However, foreign institutional investors have almost reached the limit of debt they can buy, and a failure to increase it would mean India could miss out on any further flows.
Foreign funds have bought debt worth around $17 billion so far this year.
"Although the new GDP data is encouraging, we need to see more signs that the government is boosting its revenue and a commitment that inflation will be brought under control," said Dwijendra Srivastava, head of fixed income at Sundaram Asset Management Company in Mumbai.
"The 10-year bond may continue to hover around these levels and the data on inflation will be watched."
The 2024 10-year bond yield, which became the benchmark last month, fell 1 basis point to end at 8.55 percent.
Bonds also benefited as liquidity in the market has been ample on the back of government spending kicking in, with overnight cash rates continuing to be under the repo rate despite the announcement of a reverse repo auction on Monday.
In the overnight indexed swap market, the benchmark five-year swap rate ended 2 bps lower at 8.02 percent and the one-year rate ended steady at 8.45 percent.
Volumes were sluggish after the long weekend.
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