Indian bonds rally on demand boost; 10-year yield’s weekly fall most in 4 months

By Khushi Malhotra and Dharamraj Dhutia

MUMBAI, March 21 (Reuters) - Indian government bonds rallied this week, with the 10-year benchmark bond yield falling the most in four months, amid growing expectations that another domestic rate cut could unleash pent up investor demand.

The benchmark 10-year bond yield ended at 6.6249%, lowest since January 21, 2022, compared with its previous close of 6.6366%.

For the week, the yield fell 7 basis points, the biggest such move since the week ended November 29.

Indian government bonds were not performing due to tight liquidity conditions, but now there is high demand, said Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank.

"Banking system liquidity is improving, fear of rupee depreciation has gone down, and rate cut expectations have brightened - so all these factors are pushing the yields down. Till policy, yields will not move up, that is for sure. We will continue to see a downtrend."

Bond yields began easing in the early part of the week after stronger-than-expected demand at a heavy state debt auction and a surprise announcement from the Reserve Bank of India for a third debt purchase auction for this month.

The RBI will buy bonds worth 500 billion rupees ($5.82 billion) next week, after the purchase of a similar quantum of bonds this week and the last.

The central bank has infused over 5.50 trillion rupees into the banking system so far through a combination of primary and secondary market bond purchases, fx swaps and early-April maturity repos.

It has also planned to inject around 860 billion rupees through another three-year fx swap next week.

Meanwhile, the Federal Reserve maintaining its 2025 rate cut outlook and a sharp appreciation in the local currency against the U.S. dollar has enhanced bets over the RBI's policy, due on April 9.

The central bank is expected to cut rates by 25 bps, following its 25-bps cut in February, its first reduction in nearly five years. ($1 = 85.9760 Indian rupees) (Reporting by Khushi Malhotra and Dharamraj Dhutia; Editing by Janane Venkatraman)