* India's 10-yr bond yield ends at 7.91 pct, 2 bps higher
* S&P analyst says possibility of India losing investment
grade rating receded
* Apr-Dec deficit 78.8 pct of budgeted full fiscal year
By Subhadip Sircar
MUMBAI, Jan 31 (Reuters) - Indian government bonds fell on
Thursday, but posted their biggest gains in six months in
January, helped by hopes of monetary easing by the central bank
and limited debt supply as the government looks to meet its
However, the outlook remains more uncertain. The Reserve
Bank of India delivered a widely expected 25 basis points
interest rate cut this week but adopted a more cautious tone
about future easing than investors had expected.
The central bank has also made the country's current account
deficit, which hit 5.4 percent of GDP in the September quarter,
a factor in monetary policy, making capital flows and the
implications of the government's upcoming budget on the fiscal
deficit key triggers for Indian bonds.
Bond sales will also resume after the government conducted
only one weekly auction this month, with 120 billion rupees of
debt due to be sold on Friday.
"Traders have been trimming positions and the immediate
outlook looks bearish given the supplies lined up," said
Baljinder Singh, a trader with state-run Andhra Bank.
He expects the long 8.30 percent 2042 bond in Friday's
auction to have a tail, which implied weak demand for the paper.
The 10-year benchmark bond yield ended at
7.91 percent, up 2 basis points (bps) from its Wednesday's
close. It fell 14 bps in January, its biggest monthly decline
since July and third successive month of fall, as per Thomson
Investors will be closely watching to see whether Finance
Minister P. Chidambaram manages to stick to his fiscal deficit
target of 5.3 percent in the current fiscal and shave it lower
to 4.8 percent in the next as he has promised.
India's fiscal deficit during the
April-December period was 4.07 trillion rupees ($76.22 billion),
or 78.8 percent of the budgeted full fiscal year 2012/13 target,
government data showed on Thursday.
The possibility of India losing its investment grade credit
rating has receded as a result of the reform measures taken by
the government since September last year, an analyst with rating
agency Standard & Poor's told Reuters on Thursday.
Manmohan Singh's government has taken some bold steps in
allowing state-run fuel retailers to raise diesel prices
incrementally as well as clamping down on government spending to
cut its bloated fiscal deficit.
Dealers are also focused on the large supply scheduled in
February. The government will sell 480 billion rupees of bonds
in the month, completing its scheduled fiscal borrowing of 5.7
The benchmark 5-year overnight indexed swap, an interest
derivative contract which is used to guard against changes in
funding costs, hovered near seven-month highs, rose 1 bp to 7.26
The 1-year overnight index swap (OIS) rate
rose also 1 bp to 7.63 percent.
(Editing by Anand Basu)