MUMBAI: Indian federal bond prices fell as dealers made way in their portfolios for the debt auctioned on Friday, helping send yields to their biggest weekly advance in four months after the central bank disappointed by keeping interest rates on hold.
Bond markets were routed after the Reserve Bank of India also raised its inflation outlook and maintained its hawkish stance, casting doubt about how soon the central bank will cut interest rates.
Those concerns were further exacerbated after India confirmed the country's first summer drought in three years, sparking fears about higher food prices and a delay in meaningful fiscal reforms.
Traders will now closely await a slew of data releases this month, starting with the June factory data on Aug. 9, with inflation and economic growth reports due out later this month.
"The IIP and inflation numbers will be the near-term concerns for the market. The large supply and the drought situation are the medium term worries," said Lakshmi Iyer, head of fixed income and products at Kotak Mutual Fund.
The benchmark 10-year bond yield rose 4 basis points to close at 8.26 percent.
India raised 150 billion ($2.7 billion) in debt on Friday at decent demand. Whether that can continue will be a key question, especially since the government has another 600 billion rupees of supply lined up during the month.
The country has budgeted 3.7 trillion rupees of borrowing in the first half of the fiscal year, and signs of fiscal indiscipline could have a big impact on bond markets.
The benchmark 5-year overnight indexed swap rate closed steady on day at 7.04 percent while the 1-year rate eased 1 bp to 7.73 percent.
On the week, the five-year rate rose 6 bps while the one-year rose 10 bps.
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