MUMBAI: Indian federal bond yields fell for a fourth day on Monday, bolstered by the central bank's assurance to provide adequate liquidity, weak economic data and shaky shares.
By 10:50 a.m. (0520 GMT), the benchmark 10-year bond yield was down 2 basis points at 8.63 percent, after dropping 17 bps last week.
"The market is in a bullish mode as the central bank has said they would provide liquidity. The market is interpreting this as further open market operations in coming weeks," said Murthy Nagarajan, head of fixed income at Tata Asset Management.
The central bank has conducted two rounds of debt repurchases over the past two weeks to help ease tight cash conditions and ensure government bond sales sail through smoothly.
Traders are betting on similar buybacks through open market operations (OMOs) every week, with borrowings by banks at the central bank's daily repo auctions running at a high 828.45 billion rupees ($16.1 billion).
The Reserve Bank of India (RBI) will continue to inject liquidity to ensure smooth functioning of the financial markets and tide over the tight conditions in the near future, a deputy governor said on Saturday.
"We have been injecting liquidity into the market through the liquidity adjustment facility and open-market operations, and we will continue to do so as conditions warrant," Subir Gokarn said.
Total volume traded on the central bank's electronic trading platform were at a high 54.35 billion rupees), compared with the normal 35 billion to 45 billion rupees dealt in the first two hours of trade.
There could be some profit-taking after bond prices rallied over the last few sessions, traders said. The 10-year yield moved between 8.61 and 8.66 percent in early trade.
Traders are also waiting for the details after market hours on Monday of this week's scheduled debt auction for 130 billion rupees.
Expectations remain for a cut in the cash reserve ratio (CRR), or the proportion of deposits that banks need to set aside with the central bank as cash. The ratio now stands at 6 percent.
"We think markets are likely to continue to price in a CRR cut until further OMO announcements are made. However, we think the RBI is unlikely to cut the CRR just yet and continue to expect it to offset incremental tightness in liquidity by OMO purchases," strategists at Barclays Capital said in a note.
"We think a CRR cut at this juncture would have a negative impact of stoking inflation expectations as it might convey the signal that the RBI has moved away from its anti-inflationary stance," they wrote.
The central bank is set to review monetary policy on Dec. 16, with most analysts and market participants expecting it to hold rates unchanged.
Barclays estimates the central bank will inject 1 trillion rupees into the system via OMOs before end-March 2012.
Traders said weak economic data along with easing price pressures were seen aiding sentiment for bonds. Strong response at an auction of debt investment limits to foreign funds had also helped pull yields down last week.
India's main share index was trading down 0.5 percent, fuelling further demand for safe-haven government debt.
The benchmark five-year swap was down 1 basis point at 7.14 percent, while the one-year rate was 2 bps higher at 7.90 percent. They had dropped 10 and 6 bps respectively on Friday.
US Treasury debt prices rose on Friday as overhanging worries about the euro zone debt crisis overshadowed an encouraging report on US jobs growth, rekindling safety bids for bonds ahead of key policy events in Europe next week.
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