Bonds rose the most in a week after the central bank offered to buy existing debt through an auction on Thursday, easing concern record borrowing will drive yields higher.
The yield on the most-traded 6.90% note due July 2019 fell 5 bps to 6.86% at the close. The rupee declined 0.2% to 48.52 a dollar at the close. The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, declined. The rate, a fixed payment made to receive floating rates, fell to 6.26% from 6.36% on Tuesday.
Benchmark notes also gained on speculation the government?s plans to sell shares in some state-owned companies will help raise funds to finance its biggest deficit in 16 years. The RBI said on Tuesday it will buy as much as Rs 6,000 crore in open-market operations. Surplus cash at lenders will also help fuel demand for the securities, said Anoop Verma, a bond trader at Development Credit Bank.
?The central bank?s efforts together with liquidity at lenders are helping bonds, and a drop in yields may become a short-term trend,? Mumbai-based Verma said.
Cash rates ended near the reverse repo rate of 3.25% as banks bridged their cash short-falls comfortably amid easy liquidity conditions. Demand for funds is typically higher during the first week of a reporting fortnight, but since early April that demand was unable to impact the overnight money rates, with more than Rs 1 lakh crore of free cash in the system. The overnight money closed at 3.20/30%, from its previous close of 3.25/30%.