By Suvashree Choudhury
MUMBAI, Dec 6 (Reuters) - India's benchmark 10-year bonds gained on Wednesday after the central bank stuck to a more balanced tone on inflation and market liquidity, in a relief to investors who had braced for more hawkish comments.
The Reserve Bank of India kept its policy rate steady at 6.00 percent as widely expected, but slightly softened its language on inflation by saying risks were "evenly balanced."
Bond investors were further relieved after RBI Deputy Governor Viral Acharya said he expected "slightly surplus" liquidity by March, reducing some of their concerns that the central bank would continue with aggressive open market debt sales to drain out cash from the financial system.
"Market is relieved that the RBI did not raise its anti-inflation rhetoric," said Anindya Das Gupta, managing director and head of trading at Barclays India.
"Market was fearful of a slightly more hawkish tone," he added. "So in a sense there is no fresh bad news which is a bit of a relief."
The benchmark 10-year bond yield ended at 7.03 percent, compared with around 7.07 percent right before the RBI decision came in. The yield had closed at 7.06 percent on Tuesday.
Meanwhile, the broader NSE index dropped 0.7 percent and the rupee weakened to 64.51 to the dollar from 64.38 on Tuesday.
The positive end in bond markets comes after a recent sell-off sent the 10-year bond yield up by more than 60 bps since the RBI last cut the repo rate by 25 bps in early August.
Bond markets have pummelled as an acceleration in inflation has sharply reduced the prospect of rate cuts, while worries mount that the government would borrow more from debt markets as it struggles to meet its annual fiscal deficit target.
The RBI also contributed to the sell-off by selling 900 billion rupees ($13.95 billion) via open market operations since July to drain out excess cash accumulated after India's shock move to ban higher-value bills late last year as well as the central bank's foreign exchange market interventions. ($1 = 64.5200 Indian rupees) (Editing by Subhranshu Sahu)