MUMBAI: India's benchmark 10-year bonds ended flat on Tuesday as continued profit-taking offset what investors saw as encouraging comments from new Finance Minister Arun Jaitley on fiscal consolidation.
Investors were also briefly spooked after cut-off yields at the 10 states' bond auction were higher than market expectations.
Benchmark 10-year bond yields are hovering just above a four-month low hit on Friday, and whether debt markets can sustain gains will depend on the fiscal measures undertaken by the government of Prime Minister Narendra Modi and Finance Minister Jaitley.
Investors will thus pay close attention to the new budget, expected by early July, which will also unveil borrowing plans for the rest of the fiscal year.
Jaitley on Tuesday assured investors that he would focus on bringing down fiscal deficit and tackling high inflation, but did not provide specifics.
"They have made the right kind of noises on fiscal consolidation, and on bringing subsidies down, so the expectation is they should stick to the current borrowing plan," said Debendra Dash, a fixed income dealer with DCB Bank.
Dash expects the 10-year bond yield in a band of 8.50-8.75 percent until the Budget.
The benchmark 10-year bond yield closed flat at 8.67 percent.
Continued profit-booking pressured bonds, as investors look forward to the 160 billion rupees ($2.72 billion) bond auction on Friday, which includes a new 14-year bond.
Meanwhile, the Reserve Bank of India is due to review policy on June 3 amid widespread expectations that it will leave interest rate unchanged.
RBI Governor Raghuram Rajan met Jaitley on Tuesday and said fighting inflation would continue to be a top priority, although the central bank will also aim to strike a balance between promoting economic growth and containing inflation.
In the overnight indexed swap market, the benchmark five-year swap rate and the one-year rate both ended down 2 bps each at 8.14 percent and 8.38 percent, respectively.
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