MUMBAI: Indian government bonds fell for a fifth consecutive session on Friday on continued concerns about potential rate hikes should inflation remain high and about cash tightness should the government cut spending to meet its fiscal deficit target.
Bonds ended the week with yields 16 basis points higher, after two weeks of decline.
After surprising investors with a pause in rates last week, the Reserve Bank of India has said its next rate decision will depend largely on the incoming data, particularly of the wholesale and retail inflation for this month.
Inflation is expected to have eased in December, but any negative surprises could lead the RBI to rate hikes as early as its next policy review in late January, according to traders.
"The market is looking for clarity on interest rates. I do not think it is a good time to get in," said Killol Pandya, senior fund manager-debt at LIC Nomura Mutual Fund.
"We are seeing a steepening of the yield curve with a pivot around the 3- to 5-year segment," he said.
The benchmark 10-year bond yield closed up 7 bps at 8.96 percent after moving in a range of 8.88 percent to 8.97 percent.
The Reserve Bank of India sold 150 billion rupees of bonds on Friday, but 6.15 billion rupees of the short 2019 bonds had to be underwritten by primary dealers as the central bank did not accept all bids at the offered yields.
Traders are also awaiting the release of a RBI report due by the end of the month that is expected to unveil a major change in the monetary policy to explicitly make managing consumer inflation, rather than wholesale prices, its main objective.
Cash also remains a key concern for traders with banks resorting to the central bank's Marginal Standing Facility window, an emergency funding facility. Any cut in spending by the government to meet its fiscal deficit aim will add to the shortage.
In the overnight indexed swap market, the benchmark five-year swap rate closed up 2 bps at 8.45 percent, while the one-year rate ended unchanged at 8.49 percent.
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