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MUMBAI: Indian government bond yields are expected to decline in early deals at the start of the week, after the Reserve Bank of India surprised markets when it bought a large quantum of bonds, signalling its intent to keep liquidity conditions easy.

The 10-year bond yield is likely to move between 6.65% and 6.70%, a trader with a private bank said, compared with the previous close of 6.7206%.

"The entire sentiment will now turn favourable for the bulls, as the central bank not only started buying bonds, but also bought it in bulk, which indicates that they are willing to listen to the markets and act accordingly," the trader said.

The RBI made net purchases of government bonds worth 101.75 billion rupees ($1.18 billion) in the secondary market in the week ending Jan. 17.

India bond yields rise in lead up to domestic inflation data

This was its first such operation in more than three years.

The central bank typically sells or buys bonds to adjust banking system liquidity and rates to align them with its monetary policy. However, these operations also impact yields.

Incidentally, the purchases began close to the heels of the announcement of daily overnight variable rate repo auctions that the central bank has been conducting.

The so-called 'others' category of investors, which includes the RBI among other investors, bought bonds worth around 200 billion rupees on a net basis in the week ended Jan. 17, data from the clearing house showed.

This category was also the net buyer of 187 billion rupees worth of bonds last week, which has left traders speculating about the presence of the central bank.

The data will be released on Jan. 31.

Meanwhile, India's federal budget announcement due on Feb. 1, with a major focus on fiscal deficit target and borrowing numbers, will be the next large trigger for bonds.

Market participants expect the government to announce a fiscal deficit target of around 4.4%-4.5% of gross domestic product for the next financial year, with gross borrowing in the range of 14 trillion rupees to 14.50 trillion rupees.

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