The yield on the most-traded security due in 2017, which moves inversely to the price, fell to a 14-month low as traders increased bets Reserve Bank of India will lower the benchmark from a 5 1/2-year high as inflation held below the central banks end-March estimate for an eighth month.
The optimism on interest rate cuts in India is set deep within the market, said Kamlesh Chand, a fixed-income trader at IndusInd Bank Ltd in Mumbai.
The yield on the most-traded 7.99% note due July 2017 fell 13.6 basis points, or 0.14 percentage point, this week to 7.41 percent in Mumbai, according to RBIs trading system. The price rose 0.92, or 92 paise, per Rs 100 face amount, to 103.88.
A fall in stock markets, a housing slump, and credit-market losses from defaulted subprime mortgages prompted the US Federal Reserve to make an unexpected rate cut on January 22.
The rupee gained for a second day on speculation global funds will buy higher-yielding emerging- market assets after the Federal Reserve cut its key interest rate. The currency added to Thursdays gain, which was the most in almost two months, after finance minister Palaniappan Chidambaram said on Thursday that the reduction in US borrowing costs may attract more capital flows to the South Asian nation.
The US-India interest-rate differential got wider, said Puneet Sharma, chief currency trader at state-owned Allahabad Bank in Mumbai. That, coupled with Indias strong economic growth, should attract more capital flows, which will help the rupee.'
The rupee strengthened 0.2% to 39.3975 per dollar in Mumbai, according to data compiled by Bloomberg. It climbed as high as 39.355.
The spread between two-year Indian government bonds and similar-maturity US Treasury notes widened to 5.44 percentage points this week, the most in six years.