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India bond yields end up as traders book profits before new 10-year bond sale

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A youth walks past the entrance of the Reserve Bank of India head office in Mumbai on Nov. 17, 2021. India's central bank raised its main lending rate off record lows in a surprise move on Wednesday to contain rising inflation, shocking markets and pushing the benchmark 10-year bond yield to its highest levels in three years.
Punit Paranjpe | Afp | Getty Images

Indian government bond yields ended higher on Thursday, as traders lightened books after strong gains in the previous session, awaiting fresh supplies of a new 10-year bond due for auction on Friday.

The benchmark 10-year government bond yield ended at 7.2421%. The yield had dropped 11 basis points to 7.1825% on Wednesday, posting its biggest single-day fall in two months.

"After heavy buying yesterday, it seems there was some profit booking today," said Shrisha Acharya, a fixed income dealer at DCB Bank.

The central government will auction bonds worth 330 billion rupees ($4.14 billion) on Friday, including 130 billion rupees of the new 10-year note, which will replace the existing benchmark in coming weeks. The 10-year bond is expected to see strong demand.

Lakshmi Iyer, chief investment officer for debt and head products at Kotak Mutual Fund expects the yield on the new 10-year bond to be 5-6 basis points lower than prevailing 10-year bond yield, which is seen moving in a range of 10-15 basis points from current levels.

Global oil price moves will be watched for cues, Iyer said. India imports bulk of its crude oil requirement.

In the recent past, bond yields have softened tracking fall in crude prices and expectation of further easing in inflation.

"Oil has been a saving grace no doubt in the recent past," Iyer said, adding, "the key trigger is the direction of oil prices – as our sensitivity to this commodity is among the highest."

Brent crude futures were trading largely unchanged at $93.65 per barrel on Thursday, after declining to its lowest level in six months on Wednesday.

India's retail inflation dipped to 6.71% in July, easing for the third month in a row, and missing the 6.78% forecast by economists in a Reuters poll.

On Wednesday, bond buying got a boost from fall in oil prices and comments from Goldman Sachs analysts Danny Suwanapruti and Santanu Sengupta after they pointed to India likely being included in global bond indexes in 2023, which could bring in passive inflows of around $30 billion.