MUMBAI: India's existing benchmark 10-year bonds fell slightly on Monday as stronger-than-expected economic growth and manufacturing data solidified the case for another rate hike by the central bank, given continued inflationary pressures.
Data late on Friday showed the Indian economy grew a stronger-than-expected 4.8 percent in the three months through September, while a private HSBC survey showed earlier in the day that manufacturing activity returned to growth in November after contracting for the previous three months.
The country's balance of payment deficit jumped sharply despite a huge improvement in current account deficit in July-September primarily due to slowing capital inflows, central bank data showed on Monday.
Still, not all traders said a rate hike at the Reserve Bank of India's policy review next month was a given, with inflation data likely to be the key driver. The HSBC survey of manufacturing showed the rise of input costs slowing, in a potentially positive harbinger.
"Most people are now expecting a 25 basis points increase in the repo rate, so that should not be a big market mover," said Ganti Murthy, head of fixed income at Quantum Asset Management.
The existing benchmark 10-year bond yield closed up 1 basis point at 9.05 percent.
The new 10-year bond yield closed steady at 8.74 percent.
Earlier in the day, however, bonds had gained as the improvement in the liquidity situation and the lower supplies in December cheered sentiment.
Overnight cash rates dropped to 6.75/6.80 percent. Banks overnight borrowing from the central bank has dropped to around 250 billion rupees from over 400 billion rupees for most of October and November.
Traders said the large spread between the overnight borrowing rate and the bond yields was also prompting some buying in debt.
Traders said the rupee's outlook will continue to be important for bonds.
The rupee is trading without central bank support after the Reserve Bank of India said earlier state-run oil companies were now sourcing their entire dollar demand in markets, but it would consider re-opening a special swap window on "rare days" of strong greenback demand.
The RBI has also closed two separate concessional windows that helped banks raise funds overseas, and which attracted a total of $34 billion since September.
In the overnight indexed swap market, the benchmark five-year swap rate closed 2 bps lower at 8.32 percent, while the one-year rate fell 3 bps to 8.40 percent.
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