Indian federal bonds yields fell on Friday as strong interest was seen at the open market operations while the sale of 120 billion rupees in government debt attracted robust demand. The easing also reflects expectations of continuity of OMOs by the Reserve Bank of India as the cash strain in the banking system remained severe. Debt markets also benefited from a safe-haven bid, as domestic stocks came under pressure as lenders were hit by profit-taking.

"We expects OMOs to continue, thus bond yields would be capped," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank, who expects bond yields to be limited to 8.20 percent. A severe liquidity shortage is expected to continue till the month end, but some respite is likely with government spending in the first week of January.

The RBI bought 79.12 billion rupees ($1.4 billion) of government bonds through open market operations (OMO) on Friday, compared with the notified 80 billion rupees. India sold 120 billion rupees ($2.18 billion) of bonds on Friday, which saw aggressive bidding in the 8.07 percent 2017-July bonds and 8.97 percent 2030 bonds. The benchmark bond yield ended down 1 bp at 8.14 percent.

Copyright Reuters, 2012