MUMBAI: Indian government bonds dropped on Friday after hitting a two-week high in the previous session as investors booked profits ahead of key consumer inflation data next week, which will set expectations ahead of the central bank's policy review.
Cash conditions are also expected to tighten by mid-March on account of tax outflows, although bond investors could be soothed, should the Reserve Bank of India inject liquidity through open market bond purchases.
Still, the benchmark 10-year bond yield fell 5 basis points for the week, its biggest weekly fall since mid-January.
Bonds this week have benefitted from a strong rally in Indian markets that on Friday sent shares to a record high and the rupee to a near three-month high against the dollar.
"People are worried of taking long positions. We have the advance tax payments coming up and supplies are also due to start from April, and since there are no open market operations expected, there is no question of yields falling sharply," said Debendra Dash, a fixed income dealer with DCB Bank.
The benchmark 10-year bond yield closed up 2 basis points at 8.81 percent after moving in a 8.78 to 8.83 percent range.
Besides liquidity conditions, consumer price inflation data next week, along with industrial output, will be key for providing direction ahead of RBI's policy review on April 1.
In the overnight indexed swap market, the benchmark five-year swap rate closed 1 bp higher at 8.52 percent while the 1-year rate ended down 1 basis point at 8.66 percent.
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