MUMBAI: Indian federal bond yields inched lower in lacklustre trade on Thursday as traders stayed on the sidelines ahead of the sale of a fresh 10-year paper as part of the government's $2.7 billion debt auction on Friday.
The market was not impacted much by the weekly food and fuel price data, which was largely in line with expectations, traders said, and continue to expect the central bank to raise key interest rates by 25 basis points when it meets to release its annual policy on May 3.
India's food price index rose 9.18 percent and the fuel price index climbed 13.13 percent in the year to March 26, government data on Thursday showed.
High inflation in India, previously considered unacceptable, should not be accepted as "the new normal" and the central bank cannot afford to drop its guard, the Reserve Bank of India deputy governor Subir Gokarn had said on Tuesday.
The yield on the most-actively traded 8.08 percent, 2022 bond and the second-most traded 8.13 percent, 2022 bond both closed down 1 basis point at 8.05 percent.
The less liquid 7.80 percent 2020 bond closed down 2 basis points at 7.97 percent.
The government begins on Friday its borrowing programme for the 2011/12 fiscal year by selling 120 billion rupees of bonds, including the new 10-year paper.
"7.85-7.90 percent looks likely to be the cut-off on the new 10-year bond," said Manish Wadhawan, director and head of rates trading at HSBC India. "If cut-offs come in line, I don't think there should be any major change in the market. Max movement should be 2-4 basis points in either direction."
Traders said the auction cut-offs are likely to be bigger triggers than the industrial production data due on Monday.
India's industrial output probably rose 5.2 percent in February from a year earlier, picking up pace from the previous month on higher exports, the median forecast in a Reuters poll showed.
HSBC's Wadhawan said he expected liquidity to move back into the deficit mode and stay there for another two to three months, and bond yields to remain ranged till April-end.
Banks have turned net lenders to the central bank, in sharp contrast to being net borrowers of 1.06 trillion rupees at the end of the last fiscal year.
Banks parked a net 728.2 billion rupees with the RBI on Thursday, reflecting the surplus funds in the banking system.
The benchmark five-year swap rate ended down 6 basis points at 8 percent and the one-year rate closed down 3 basis points at 7.45 percent.
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