The possibility of another rate increase by the central bank on Oct. 25, when the Reserve Bank of India reviews policy, and chances of the government further increasing its borrowing plan could has been weighing on bonds in recent sessions.
Subir Gokarn, a deputy governor at the central bank, said on Wednesday, further rate increases would depend on the inflation situation and it would change its policy stance only when inflation eases.
10-year benchmark bond yield was at 8.72 percent, 2 basis points above its previous close. It had hit a high of 8.80 percent during trade on Tuesday, its highest since Aug. 28, 2008.
Total volumes on the central bank's electronic trading platform were at a moderate 38.5 billion rupees ($781 million).
Traders said yields moved up to 8.73 percent from 8.71 percent, after Gokarn's comments.
"People are generally betting on the industrial production data, overseas cues are largely flat. Expectation is for IIP to be around 4.7-4.8 percent," said Debendra Dash, a fixed income dealer with Development Credit Bank.
"If it comes below that, then we may see some buying but mostly people will await the inflation data to take a firm view," he added.
Industrial output probably grew 5.0 percent in August from a year earlier, on a favourable statistical base effect, despite successive rate rises slackening the pace of growth, a Reuters poll showed.
The wholesale price index probably rose 9.70 percent in September from a year earlier, easing slightly from 9.78 percent in August, a Reuters poll showed. The data is due around noon on Friday.
Sustained domestic bond supplies are also seen weighing. Traders will watch the results of an 80 billion rupees treasury bills sale, due after 2:30 p.m. (0900 GMT), for cues.
The government will also sell 130 billion rupees of bonds on Friday, including 40 billion rupees of 7.83 percent 2018 bonds, 60 billion rupees of 7.80 percent 2021 bonds and 30 billion rupees of 8.26 percent 2027 bonds.
The 10-year yield moved in a tight band of 8.68 to 8.73 percent, and traders forecast an 8.70 percent to 8.80 percent range until the auction.
The benchmark five-year swap and the one-year rate were both up 3 basis points, at 7.33 percent and 8.04 percent, respectively.
Prices of US Treasuries retreated on Tuesday, pushing benchmark yields to their highest in more than a month, as fears about Europe's debt crisis eased after most euro zone countries voted to expand the region's bailout fund.
Copyright Reuters, 2011