MUMBAI: India's benchmark 10-year bond saw its biggest single-day gain in four months on Wednesday on hopes the government would sell less debt after receiving surplus profit from the central bank earlier this week, while a drop in crude prices also aided.
The Reserve Bank of India had announced last week it would slash the size of this week's auction to 80 billion rupees ($1.31 billion) from 140 billion rupees, leading to hopes that future auctions would also be cut or possibly cancelled.
India's central bank said on Sunday its board had approved the transfer of a surplus profit of 526.79 billion rupees to the government for the year ended June 2014, which traders said may reduce the need for proceeds from debt auctions in the near future.
Expectations of lower borrowing helped offset initial falls in bonds at the start of the session after data on Tuesday showed consumer price inflation accelerating to a two-month high.
Brent crude oil fell for a fourth straight day on Wednesday to its lowest in more than a year, dropping below $103 a barrel as strong supplies overshadowed fears of disruptions from violence in OPEC member Iraq.
"There is likelihood that auction postponements may happen as the government has enough cash balance for now and their expenditure will be bunched up at the end of the month," said Arvind Chari, head of fixed income and alternatives at Quantum
Advisors.
The benchmark 10-year bond yield closed at 8.76 percent, its lowest level since Aug. 5 and down 9 bps on the day, its biggest single-day fall since April 17.
The new 10-year bond yield dropped 8 basis points on the day to end at 8.54 percent.
The rally in bond markets comes after prices tumbled earlier this month on falling hopes for interest rate cuts this year after the Reserve Bank of India reiterated its commitment to bring down consumer inflation to 6 percent by January 2016.
Sentiment is, however, expected to remain cautious amid the violence in Iraq and Ukraine, holding the market in a range.
The 10-year benchmark bond yield touched a three-month high of 8.89 percent in intraday trade on Friday.
In the overnight indexed swap market, the benchmark 5-year swap rate closed down 2 basis points on the day at 8.12 percent, after touching 8.18 percent earlier, its highest since May 23.
The one-year rate ended at 8.48 percent, down 2 bps on the day, after earlier touching 8.52 percent, its highest since May 16.
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