Indian government bonds snapped a four-day losing streak on Tuesday and posted their biggest daily gain in a week after global crude prices cooled and market drew comfort on fiscal deficit expectation from a media report that new government may cut budget allocation for its rural job scheme.
The 10-year yield ended down 5 basis points on the day, its biggest daily fall since June 17.
Traders also rushed to cover sold positions after recent losses in bonds had pushed the 10-year bond yield to a one-month high of 8.78 percent on Monday.
Oil slipped below $114 a barrel on Tuesday, retreating further from a nine-month high, as concerns eased that escalating violence in Iraq will affect supplies from OPEC's second-largest oil producer.
Earlier in the day, local news agency NewsRise reported the new government plans to sharply cut budgetary support to a rural employment guarantee programme and may seek direct funding from Asian Development Bank among others for finance, citing a senior government official familiar with the development.
The market is closely monitoring developments ahead of the new government's federal budget to be presented on July 10, which will hold details of 2014/15 government borrowing.
"Yields had risen very fast on Iraq crisis so we have seen short covering now but until the budget, yields should remain range-bound due to the uncertainty on borrowing," said Debendra Kumar Dash, a fixed income dealer with DCB Bank.
He expects the 10-year yield to trade in a range of 8.65-8.75 percent until the budget.
The benchmark 10-year bond yield ended down 5 basis points on the day at 8.72 percent.
Earlier in the day, traders cited little impact from the cutoffs at the state bond sale, which were largely in line with expectation.
In the overnight indexed swap market, the benchmark five-year rate closed down 5 bps at 7.97 percent, while the one-year rate ended 1 bp lower at 8.37 percent.
($1 = 59.7000 Indian Rupees)