* Sharp improvement in liquidity conditions support bonds
* Repo borrowings fall to 115.3 billion rupees
* Strong demand seen in 150 bln rupees debt auction
By Subhadip Sircar
MUMBAI, July 6 Indian federal bonds yields fell on Friday as domestic liquidity continued to ease sharply while a sale of 150 billion rupees in government debt attracted strong demand.
Debt markets also benefitted by a safe-haven bid, as domestic stocks came under pressure after China, the euro zone and Britain loosened monetary policy on Thursday, sparking worries about global economic growth.
The easing comes ahead of the Reserve Bank of India's policy decision on July 31, though few analysts expect the central bank to follow with rate cuts of its own after declining to do so last month because of inflationary pressures.
"The RBI may be inclined to cut rates given the global situation and domestic growth, but may still prefer to wait for one more policy," said Mahendra Jajoo, head of fixed income at Pramerica Asset Managers.
The benchmark 10-year bond fell 3 basis points on the day, ending the week unchanged. Reuters has switched benchmark designation to this debt starting on Tuesday.
The previous 8.79 percent 2021 10-year bond closed down 2 basis point at 8.32 percent on Friday, while the most traded 9.15 percent 2024 bond settled down 1 basis points at 8.38 percent.
Liquidity conditions have improved sharply this week, with the deficit in the banking system narrowing sharply to around 450-500 billion rupees ($8.1-$9.0 billion) from over a trillion rupees a week ago, according to traders.
Month-end government spending towards salaries, a fall of the currency in circulation, and the release of oil subsidies are some of the factors contributing to the easing cash supply, traders added.
In another sign of improving liquidity conditions, bids at the central bank's repo window fell further to 115.3 billion rupees.
Bonds were also supported by aggressive cutoffs at a central bank auction. The RBI sold 150 billion rupees of government bonds, including a new 14-year paper.
The strong demand helped offset some of the disappointment after an auction of unused debt limits to foreign institutional investors on Wednesday attracted only tepid demand, due to lock-in periods that were seen making the offering more unattractive.
The one-year OIS rate closed down 3 basis points at 7.73 percent, while the five-year rate fell 5 basis points to 7.16 percent. (Editing by Rafael Nam)
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