MUMBAI: Indian government bonds gained on Friday, drawing comfort from easing inflation and a recovery in the rupee, but hopes of a rate cut still remain dim at the central bank's meeting on Monday.
Headline inflation slowed for a fourth straight month in May to 4.7 percent, but the slide in the rupee has renewed concerns about the current account deficit, while high retail inflation is further clouding hopes of a rate cut.
Concerns also remain about foreign investors who have pulled out $3.8 billion from the debt market over the past 16 sessions.
"Sluggish economic activity and benign inflation do make a case for monetary easing. But a repo cut can only help in the periphery," said Aniruddha Iyer, assistant vice president, fixed income at Quant Capital.
The 7.16 percent 2023 bond yield, which Reuters considers the new 10-year benchmark, ended 2 basis points (bps) lower at 7.31 percent. For the week, it was 7 percent higher.
The RBI's meeting comes after central banks in the Philippines and South Korea held rates this week amidst the spike in global risk aversion.
Bond investors are also likely to watch movements in the rupee, given that recent falls are believed to be spurring selling from foreign investors worried about their potential returns.
Interest rate swaps fell tracking improving liquidity and easing inflation.
The longer-end five-year swap rate was 4 bps lower at 6.97 percent. The one-year swap rate ended 3 bps down at 7.21 percent.
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