Ten-year bonds fell for a second consecutive day as the highest overnight money rate in almost two weeks deterred investors from buying debt with borrowed funds.
The 10-year bond yield, which moves inversely to the price, rose to the highest in almost three weeks, as lenders depended on the central bank for funds this week.
That was after banks, the biggest buyers of government debt, paid Rs7,000 crore this week to buy securities at an auction on 23 November.
“There is no clarity on how the cash situation in the banking system will evolve, which is keeping the undertone uncertain,” said Mahesh Pai, a trader with state-owned Canara Bank in Mumbai.
“So, I expect yields to be under pressure to rise in the near term.”
The yield on the benchmark 7.99% note due July 2017 rose 2 basis points, or 0.02 percentage points, to 7.92% in Mumbai on Wednesday, according to the trading system of the Reserve Bank of India (RBI).
The price fell by 14 paise per Rs100 face amount, to Rs100.45. The drop was the biggest since 8 November.
Cash in the system has also declined after RBI asked lenders to keep aside more money as reserves from 10 November. The 10-year yield may rise to 7.96% this week, Pai added.