MUMBAI: Indian federal bond yields eased on Monday as adequate cash in the banking system and a limited supply of fresh paper spurred buying, partly offsetting the spike in yields on Friday after stronger-than-expected June-quarter economic growth.
Banking system liquidity has remained largely comfortable over the last two months with the deficit mostly within the central bank's comfort band of 500-600 billion rupees.
Repo bids fell to 168.30 billion rupees on Monday, its lowest in nearly two months.
Dealers said bonds will also benefit from replacement demand due to redemption of existing bonds worth 180 billion rupees, due by mid-September.
"Bonds will remain well supported on easing liquidity and only one auction in the run-up to the September policy," said Prasanna Patankar, senior vice president at STCI Primary Dealership.
"There are still some who are betting that RBI may surprise with a rate cut."
India will sell 160 billion rupees of bonds this week, but there are no subsequent bond sales till the central bank's policy on Sept 17.
The benchmark 10-year bond yield ended 2 b asis points lower at 8 .22 p ercent.
Total volume on the central bank's electronic trading platform was at a moderate 165.65 billion rupees.
Bond yields had spiked on Friday after April-June quarter economic growth came in at 5.5 percent, as against expectations of a sub-5-percent rise.
The central bank has said keeping inflation in check remains the primary focus of its monetary policy, and the GDP data has dashed hopes of a near-term rate cut.
RBI is expected to keep its key interest rate steady this month, a Reuters poll showed, and economists see only a slight easing this calendar year.
Barclays Capital, in a note, said it remained long on the 10-year paper on expected policy support in the form of rate cuts and open market purchase of bonds by the central bank.
It expects the 10-year yield to ease to 7.50 percent by end-October.
The benchmark five-year swap rate fell 1 basis point to 7.16 percent, while the one-year rate was also down 1 bp to 7.80 percent.
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