Indian bond yields fell on Thursday on expectations of a rate cut as early as in the June policy review, on the back of benign inflation data and the central bank chief's comment that the data would be taken into account in future monetary policy decisions.
The 10-year bond yield fell 7 bps to 7.39 percent. It had fallen to 7.35 percent on Wednesday, the lowest since Dec. 2, 2009.
"The market is trying to find an equilibrium level commensurate with the emerging inflation outlook," said Sandeep Bagla, executive vice president at ICICI Securities Primary Dealership.
According to a new Reuters snap poll, 7 of 14 economists, who in a previous poll did not expect a rate cut in June, now see a repo rate cut after inflation eased in April.
India's headline inflation fell below 5 percent in April, dropping within the central bank's comfort zone for the first time in more than three years and fuelling market hopes for more monetary easing to revive flagging economic growth.
On Tuesday, the Reserve Bank of India Governor Duvvuri Subbarao said he was "very happy" with the data and the central bank will take note of the softening inflation.
The most-traded 8.33 percent, 2026 bond yield also slipped 5 bp to close at 7.42 percent.
In the when-issued trades, the new 10-year 2023 bond, which will be auctioned on Friday as part of the 150 billion rupee ($2.8 billion) bond auction, closed at 7.21 percent, below the repo rate for a second consecutive session.
Securities trade on a when-issued basis when they have been announced, but not yet issued.
Bagla expects the 2023 bond cut-off at Friday's auction to be around 7.20-7.25 percent.
Some traders attributed Thursday's buying spree to short-covering triggered after state-owned banks bought nearly 30 percent of bonds on Wednesday, according to trading and reporting platform the Clearing Corp of India (CCIL).
The total volume reported on the CCIL platform was 865.55 billion rupees, above the daily average volumes reported so far this week.
The benchmark 5-year swap rate ended 3 bps down at 6.72 percent, the lowest since September 2011. The one-year rate was down 2 bp to 7.08 percent, the lowest since January 2011.