MUMBAI: Indian government bonds recovered from one-month lows to end higher on Friday after the weekly debt sale was fully subscribed, with the cutoffs yields coming in lower-than-expected, signalling good demand.
That put a more optimistic end to a month marked by two contrasting halves for debt markets. A rally at the start of the year was undone last week after a central bank panel recommended making taming consumer inflation a priority.
The Reserve Bank of India on Tuesday unexpectedly raised interest rates for the third time in five months, while bonds were also caught in an emerging market rout sparked by fears of foreign investor outflows as the Federal Reserve cuts down its monetary stimulus.
As a result, benchmark 10-year bond yields ended 5 bps lower in January.
Traders say they expect a period of range-bound trading, with the outlook for the rupee and emerging markets influencing markets.
How India will meet its fiscal deficit target of 4.8 percent of gross domestic product for the year ending in March and a 500-billion-rupee debt switch are other concerns.
India's fiscal deficit in the first three quarters of the current fiscal year ending March touched 95.2 percent of the budgeted target for the whole year.
"Yields should be range bound. Pressure on rupee and RBI focus on CPI are negatives while thinning supply is a positive," said A. Prasanna, economist at ICICI Securities Primary Dealership.
"Fiscal concerns are clear. However, government may still achieve its target by postponing subsidy payments and last minute fire sale of companies. If market conditions worsen further and prevent these sales, then the risk of slippage will be high," he said.
The benchmark 10-year bond yield closed at 8.77 percent, 5 basis points lower on the day, after earlier rising as high as 8.88 percent in the session, its highest level since Jan. 3.
Yields were up 3 bps in the week, a second straight week of rises.
Yields eased on Friday after demand for India's 140-billion-rupee auction proved to be strong, with cutoff yields in the near-end debt coming in below a Reuters poll estimate.
Traders had initially feared India would fail to sell the full amount.
Still, some caution set in on Friday after India's fiscal deficit in the first three quarters of the current fiscal year ending March touched 95.2 percent of the budgeted target for the whole year, according to data earlier.
Finance Minister P. Chidambaram is widely expected to slash investment spending to stick to his fiscal deficit target.
The one-year rate ended 1 bp higher at 8.70 percent. The benchmark five-year swap rate closed 3 bps lower at 8.42 percent.
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