MUMBAI: India's benchmark 10-year bonds hit an over four-month high on Friday after the central bank governor said the new government's plan to curb food inflation seems sensible and that he expected the public's inflation expectations to fall in the future.
"There is a sense of conviction about our plan to bring inflation down to 8 percent this year and 6 percent next year," Reserve Bank of India Governor Raghuram Rajan said in a seminar in Tokyo.
The 10-year yield fell as much as 7 basis points to 8.60 percent, a level last seen on Jan. 22, before closing at 8.64 percent. On month, the yield fell 19 bps, its biggest monthly fall since December.
All but three of the 52 economists polled by Reuters on May 15-27 expect the RBI to hold key policy rates steady in its monetary policy review on Tuesday.
"The RBI governor is optimistic that the government will shoulder the inflation fighting burden but I don't think the headline is as dovish as the market has interpreted it," said Suyash Choudhary, head of fixed income at IDFC Mutual Fund in Mumbai.
Choudhary expects the 10-year yield to consolidate around current levels.
Towards the close, traders cited profit-taking after supply from the 160 billion rupees ($2.71 billion) debt sale, which was fully sold, hit the market. The RBI set a cut-off of 8.60 percent for the new 14-year bond, above 8.65 percent shown in a Reuters poll.
Further ahead, investors will closely examine the government's new budget expected to be unveiled in early or mid-July.
In the overnight indexed swap market, the benchmark five-year swap rate ended down 4 bps at 8.09 percent and the one-year rate closed 1 bp lower at 8.38 percent.
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