MUMBAI: Indian government bonds rose on Monday after the deregulation of fuel prices and Prime Minister Narendra Modi's Bhartiya Janata Party wins in two state elections raised hopes of further reform measures from the government.
The boost to bonds came after the government on Saturday lifted diesel price controls and raised the cost of natural gas - twin moves that are expected to reduce government's fiscal subsidies.
Traders were also enthused by the big gains made by Bhartiya Janata Party in two Indian state elections, that is seen by most analysts as a prelude to unveiling of further reforms by the central government.
However the tightening of liquidity at the start of the new reporting fortnight, worsened by the festival related cash withdrawal from banks, nipped any major rally in bonds.
The overnight cash rates rose to a high of 9 percent versus its Friday close of 7.10/7.15 percent.
"The tightening liquidity will continue to put pressure on bond yields in the near term, although sentiment for bonds remains good," said Ganti Murthy, head of fixed income at IDBI Asset Management in Mumbai.
"Further, signals from the OIS market are extremely positive and movement in OIS usually precedes that in bonds."
The benchmark 10-year bond yield ended down 3 basis points at 8.36 percent. The yield had touched an intra-day low of 8.3449 percent last Thursday, its lowest since Sept. 5, 2013.
The government's move to lift price controls in diesel come as Brent crude has steadied around $86 a barrel on Monday, reinforcing expectations for easing inflation and raising some hopes of earlier-than-expected rate cuts.
India's five-year swap rate dropped 9 bps to 7.45 percent, while the one-year rate falls 15 bps to 8.06 percent, their lowest levels since July 12, 2013.
Traders also said foreign portfolio investors unable to trade in government bonds due to exhaustion of limits were placing bets in the OIS market.
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