Mumbai: Indian government bonds fell on Thursday, retreating from one-month highs hit earlier in the day despite data showing consumer inflation eased more than expected to a 25-month low as investors booked profits after a recent powerful rally.

Data late on Wednesday showed the Consumer Price Index rose 8.1% in February from a year earlier, easing from 8.79% in January, helped by moderating food prices. The data reinforced expectations the Reserve Bank of India (RBI) would keep interest rates on hold at its 1 April policy review after tightening monetary policy by 75 basis points from September to January.

Still, traders said the expectations about easing inflation have been largely priced into bonds, with benchmark 10-year yields down 12 basis points so far this month. “We possibly saw the unwinding of some positions taken in the run-up to the CPI data," said Killol Pandya, a senior fund manager-debt at LIC Nomura Mutual Fund. “I think monsoons and elections will be the next big trigger for the bond market," he said.

The benchmark 10-year bond yield rose 2 basis points to 8.74%. It fell to 8.68% earlier in the session, a level last seen on 6 February. Volumes were average at 23,625 crore. Some caution also prevailed ahead of wholesale price inflation data due on Friday, while the RBI is also set to conduct a term repo auction worth 500 billion to inject liquidity ahead of corporate tax outflows starting this weekend.

In the overnight indexed swap market, the benchmark five-year swap rate closed 1 basis point lower at 8.44% while the one-year rate also ended 1 basis point down at 8.64%. Reuters