10-year bonds gained the most in at least six weeks after the central bank said it willpurchase existing government debt at an auction tomorrow.
The yield on the most-traded securities due 2019 fell the most since they were issued on July 13 as the Reserve Bank of India said Tuesday it will offer to buy up to Rs 6,000 crore of notes maturing in 2019, 2023 and 2032.
The purchases may help limit the government?s borrowing costs as it plans to raise a record Rs 4.51 trillion in the fiscal year ending March 31.
?The central bank?s move is reducing some pressure on bonds,? said Kumar Nathani at Taurus Asset Management Co in Mumbai. ?It also offers better scope for portfolio management.?
The rupee dropped on towards 49 per dollar, weighed by demand for the US unit from oil firms and importers, although gains in shares to three-week highs offered some support.
It closed at 48.93/94 per dollar, 0.4% weaker than its previous close of 48.75/76. On August 17, the rupee had dropped to a one-month low of 49.01.
?The market was short dollar at around 48.80 levels, and then the dollar started rising versus some majors, so there was rapid short-covering, mainly by importers on account of it being month-end,” a senior dealer with a foreign bank said.
The yield on the 6.9% note due July 2019 declined 18 basis points to 7.13% at the close.
The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, decreased. The rate, a fixed payment made to receive floating rates, was at 6.39%, compared to 6.46% on Tuesday.
Cash rates ended unchanged as mostly cash-rich banks easily met their funding needs for the fortnight, with just two days to go for the reporting Friday.
The overnight money closed at 3.20/25%, unmoved from its previous close.
Banks parked Rs 1.19 trillion at the central bank?s reverse repo auction on Wednesday.
Dealers said dollar demand from importers throughout the session and were a major factor for the rupee?s decline. A fifth straight rise in the sharemarket limited the rupee?s fall, dealers said.