MUMBAI: Indian federal bond yields eased on Thursday as investors dumped riskier assets like equities and purchased safe-haven government debt ahead of an euro zone summit over the weekend.
However, a further downside in yields will be limited as the central bank is widely expected to deliver one final interest rate increase at a review next Tuesday and then pause until the end of the fiscal year in March.
By 10:55 a.m. (0525 GMT), the 10-year benchmark yield was down 3 basis points at 8.74 percent.
Total volume on the central bank's electronic trading platform was lower at 27.65 billion rupees ($559 million), compared with the usual 35 billion to 45 billion rupees dealt in the first two hours of trade.
"Lower commodity prices and the risk-off trade globally is supporting bond prices. However, I think downside in yields would be capped due to the policy next week," said Dinesh Ahuja, a fixed income fund manager with SBI Funds Management.
Riskier assets across the board from stocks, metals and commodity currencies fell on Thursday as investors grew wary about taking risks ahead of a key European leaders' summit on Sunday.
Indian shares were trading down 1.7 percent, dragged by financials ahead of an expected interest rate increase at the policy next week.
"Supply worries remain and oil companies are also asking for another fuel price increase," Ahuja added.
The government last month set market borrowing of 2.2 trillion rupees in the second half of the fiscal year starting October, sharply above the budgeted 1.67 trillion rupees.
Finance Minister Pranab Mukherjee said on Wednesday the Reserve Bank of India may be dictated by different circumstances compared to other central banks. Some major emerging economies such as Brazil and Indonesia have eased policy because of concerns about the sluggish global economy.
India's inflation barely budged in September, staying above 9 percent for the tenth straight month.
Mukherjee also said it would be a great challenge for India to achieve its fiscal deficit target of 4.6 percent of GDP in the current fiscal year.
Traders said yields would continue to trade with an upward bias but if any increase in debt buying limits for foreigners was announced, it would take some pressure off the yields.
India may consider raising the limit for foreign institutional investors in government debt from the current $10 billion, a senior finance ministry official said on Monday.
The benchmark five-year swap and the one-year rate both eased 2 basis points to 7.36 percent and 8.18 percent respectively.
US Treasury prices rose modestly on Wednesday in volatile trading as expectations dimmed that this weekend's European Union summit would result in a solution to address the euro zone debt crisis.
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