March 7, 2014 / 12:12 PM / 3 years ago

Indian bonds fall, but still post biggest weekly gain in seven

* 10-year bond yield edges up 2 bps to 8.81 pct
    * Traders awaiting inflation, factory data for cues
    * Yields see biggest weekly fall since mid-Jan

    By Swati Bhat
    MUMBAI, March 7 (Reuters) - Indian government bonds dropped
on Friday after hitting a two-week high in the previous session
as investors booked profits ahead of key consumer inflation data
next week, which will set expectations ahead of the central
bank's policy review.
    Cash conditions are also expected to tighten by mid-March on
account of tax outflows, although bond investors could be
soothed, should the Reserve Bank of India inject liquidity
through open market bond purchases.
    Still, the benchmark 10-year bond yield fell
5 basis points for the week, its biggest weekly fall since
mid-January.
    Bonds this week have benefitted from a strong rally in
Indian markets that on Friday sent shares to a record high and
the rupee to a near three-month high against the
dollar.
    "People are worried of taking long positions. We have the
advance tax payments coming up and supplies are also due to
start from April, and since there are no open market operations
expected, there is no question of yields falling sharply," said
Debendra Dash, a fixed income dealer with DCB Bank.
    The benchmark 10-year bond yield closed up 2
basis points at 8.81 percent after moving in a 8.78 to 8.83
percent range.
    Besides liquidity conditions, consumer price inflation data
next week, along with industrial output, will be key for
providing direction ahead of RBI's policy review on April 1.
    In the overnight indexed swap market, the benchmark
five-year swap rate closed 1 bp higher at 8.52
percent while the 1-year rate ended down 1
basis point at 8.66 percent. 

 (Editing by Sunil Nair)

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