MUMBAI: Indian government bond yields fell on Thursday as signs that the European debt crisis is far from over prompted local investors to seek safer assets.
A drop in crude oil prices also encouraged buyers, although a fast-weakening rupee kept yields in check, traders said.
"Anxiety about the euro zone crisis is deepening and has led to a sell-off in commodities, which sparked buying in bonds," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership.
"We are seeing good buying interest from nationalised banks at higher yield levels."
Trading was cautious ahead of the Reserve Bank of India's policy review on Friday. The central bank is widely expected to hold rates steady, but could accelerate monetary easing in 2012 as economic conditions worsen.
At 11:20 a.m. (0620 GMT), the benchmark 10-year bond yield was at 8.47 percent, down from Wednesday's close of 8.49 percent. It is expected to trade in a 8.43-8.48 percent range during the day.
Total volume on the RBI's electronic trading platform was a moderate 42.55 billion rupees ($783.6 million).
Finance Minister Pranab Mukherjee said on Thursday that India needed practical solutions to address its economic slowdown. He also said that inflation remained unacceptably high and that this, along with high interest rates, was hurting growth.
Oil tumbled more than 4 percent on Wednesday, the biggest drop in over two months as a commodities selloff led to breaches of key technical support.
However, a weak rupee is making imports including oil costlier and will keep upward pressure on inflation, traders said. The rupee hit an all-time low of 54.30 per dollar in early trading, taking losses to about 4 percent this week.
"We believe rupee depreciation is likely to impact core inflation and take away part of the gains attributable to the base affect," HDFC Securities Research said in a note on Thursday. "Accordingly, we believe WPI inflation will not fall to the extent expected."
Data on Wednesday showed India's wholesale price index, the country's most closely watched gauge of inflation, rose 9.11 percent from a year earlier, slightly more than the 9.04 percent increase forecast in a Reuters poll.
The benchmark five-year swap eased to 6.98 percent from 7.05 percent on Wednesday, while the one-year rate eased to 7.72 percent from 7.78 percent.
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