Indian government bonds traded in a narrow range on Thursday as profit-taking and caution ahead of heavy debt supply offset support from the Reserve Bank of India's dovish policy signal.
The benchmark 6.94% 2036 bond yield ended at 6.7666%, versus 6.7722% on Wednesday. The yield has dropped nearly 7 basis pointssince August 3, and fell to a three-week low in the previous session.
Bond yields move inversely to prices.
Traders are now focused on New Delhi's 320 billion rupee ($3.36 billion) bond sale on Friday, which includes the liquid five-year note.
Overall sentiment improved after the RBI's more-dovish-than-expected policy commentary on Wednesday. The central bank left the repo rate unchanged, cut its average inflation forecast for the current financial year to 5.0% from 5.1%, and lowered its core inflation forecast to 4.3% from 4.7%.
Four economists said on Thursday that the RBI is now likely to begin raising rates from December or later, as core inflation staying near the central bank's target rate reduces the case for earlier tightening.
Overnight indexed swaps, a key gauge of rate expectations, now price in about 50 basis points of hikes over the next year, down from as much as 125 basis points during the peak of the Iran crisis.
Separately, oil prices hovered near $80 a barrel in Asian trade, while the 10-year U.S. Treasury yield rose 1.5 basis points to 4.63%, limiting the scope for further gains in domestic bonds on Wednesday.
Market participants expect profit-taking by state-run banks to continue-the banks sold about $1 billion of bonds on Wednesday.
"The August policy reduces the risk of an immediate rate hike. The RBI's comfort on underlying inflation, combined with its assurance on system liquidity, should support the short-to-medium part of the yield curve," Edelweiss Mutual Fund said in a note.
RATES
India's overnight indexed swap rates inched higher as traders reversed receiving bets.
The one-year swap ended at 5.775%, the two-year at 5.9525%, and the five-year at 6.2625%. All three rates were up around 1 bp.
