MUMBAI: Indian government bonds rallied on Tuesday on speculation the government may increase the investment limits for foreign portfolio investors, bringing alive debt markets that have stagnated over the past couple of months.
Traders also cited hopes the European Central Bank would announce additional monetary stimulus at its policy meeting on Thursday, potentially sparking more foreign fund flows into India.
Trading volume in the bond market was also more than the recent average, a day after data showed India's balance of payments was in surplus for a third straight quarter in April-June.
"In a scenario where the global growth is muted, India appears in a much more favourable position as seen by recent tight fiscal deficit and expenditure figures," said Gopal Agarwal, chief investment officer at Mirae Asset Management in Mumbai.
The 2024 10-year bond yield, which became the benchmark last month, fell 3 basis points to end at 8.52 percent.
The 10-year bond yield has risen 12 bps since it was first issued in July this year.
After stronger gains at the start of the year, the Thomson Reuters 10-year benchmark yield fell 15 bps in August and 2 bps in July.
Gains on Tuesday were triggered by speculation about a hike in the FII debt limits. Similar market talk has been sparked up sporadically since foreign investors almost exhausted their quotas recently. Overseas funds have bought debt worth around $17 billion so far this year.
Dealers said sentiment was also helped by ample liquidity in the market on the back of government spending kicking in. Overnight cash rates continued to be under the repo rate despite a second consecutive reverse repo auction on Tuesday.
In the overnight indexed swap market, the benchmark five-year swap rate ended 2 bps lower at 8.00 percent and the one-year rate ended 1 bp lower at 8.44 percent.
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