Indian bonds yields flat; output data weak but inflation eyed

MUMBAI: India's benchmark bonds ended steady on Thursday, stalling after three days of gains as traders grew cautious ahead of inflation data due early next week, though debt attracted some safe-haven bids earlier in the session after output data unexpectedly fell.

Industrial output fell 1.8 percent in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and help pull Asia's third-largest economy from its worst slowdown in almost a decade.

Reserve Bank of India Governor Duvvuri Subbarao has indicated he is reluctant to cut interest rates due to inflationary pressures, while prodding the government to take measures to boost growth.

India is due to report July inflation data on Tuesday, with analysts expecting wholesale prices to have risen 7.37 percent from a year ago, compared to the annualised rise of 7.25 percent in June.

"Though the weakness in the output data calls for a RBI rate cut, the possibility of doing so would depend on the timing and depth of fiscal corrective measures taken up by the central government," said Shakti Satapathy, an analyst at AK Capital.

The benchmark 10-year bond yield closed at 8.14 percent, flat from its previous close, after falling as much as 8.10 percent during the session.

The total volume on the central bank's electronic trading platform was at a moderate 230.60 billion Indian rupees ($4.17 billion).

The benchmark 5-year OIS rate closed down 1 basis point at 7.03 percent, while the one-year rate rose 2 bps to 7.74 percent.

Traders said profit-booking ahead of the 150 billion rupee government bond auction on Friday also weighed on bonds.

Bonds have rallied this week after Chidambaram said interest rates were burdening consumers, raising expectations the government would pressure the RBI to reduce interest rates.

Easier liquidity conditions have also helped support bonds.

Reserve Bank of India's transfer of 160.1 billion rupees surplus profit to the government for the accounting year ended June 30, is expected to further improve liquidity conditions, though it came lower than market estimates of 250-300 billion rupees.

Average liquidity deficit with banks has come down to around 500 billion rupees from close to 1 trillion rupees at the end of June.