MUMBAI: Indian government bonds ended down for a second straight session on Friday, as cautious investors cut large bond holdings due to uncertainty around the new government's budget and inflation concerns weighed on sentiment.
The 10-year benchmark bond yield rose for a third straight week, mostly due to the Iraq crisis which has pushed up global oil prices.
Traders expect yields to be range-bound until the federal budget on July 10 amidst widespread expectation that the Narendra Modi-led government would push through reforms and take steps to rein-in fiscal deficit.
In the Reserve Bank of India's financial stability report published on Thursday, the RBI Governor Raghuram Rajan noted that the government was under some pressure to deliver in order to match expectations.
"Markets expect more decisiveness in government policy formulation, as well as greater efficiency in implementation," Rajan said, and added that a predictable tax regime, low and stable inflation will be key to financial stability.
The benchmark 10-year bond yield ended up 2 basis points on the day at 8.75 percent.
"The markets are looking forward to the budget numbers and what it has in store for the bond markets. Beyond the budget, the markets are quite concerned over the rainfall deficiency and are apprehensive of an uptick in food inflation," said Badrish Kulhalli, fund manager-fixed income, HDFC Standard Life Insurance Co.
Investors were also cautious due to potential inflationary pressures from the scant monsoon rains so far that have pushed up food prices.
India's rain shortfall shrank in the third week since the onset of its monsoon, recovering a little after a poor start, but farmers remain concerned as rains are a third below normal due to sluggish progress toward grain belts in the northwest.
Earlier in the day, traders cited little impact from the results of the 150-billion-rupee debt sale, where cut-offs were largely in line with expectations. However, the central bank devolved 9.62 billion rupees of 8.27 percent 2020 bonds on underwriters.
On Wednesday, the RBI had only accepted bids worth 18.75 billion rupees at the 364-day t-bill sale, much below the 60 billion rupees offered, which traders said indicated the central bank's discomfort with higher yields.
In the overnight indexed swap market, the benchmark five-year rate closed down 3 bps at 7.91 percent, while the one-year rate ended down 1 basis point at 8.37 percent.
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