India's 10-year bonds rallied for the fifth straight session, with yields dropping to the lowest since July 2010, as improving trade data and falling commodity prices are seen giving the central bank more room to cut interest rates.
The country's exports fell 1.8 percent in the 2012/13 fiscal year, but they were up for the third straight month in March, offering some relief to the record current account deficit.
Finance Minister P. Chidambaram said on Wednesday he expected the current account deficit for 2012/13 fiscal year that ended in March to be around 5 percent of gross domestic product and perhaps half that amount in one to two years.
Bonds held on to their gains after India auctioned 150 billion rupees in debt, as the absence of a debt sale next week, and prospects of a rate cut by the Reserve Bank of India ensured robust demand at the auction.
"Absence of auction in the rest of the month coupled with supportive macro triggers and rate cut hopes are expected to move the bond yields in the southward direction," said Shakti Satapathy, a fixed income analyst at AK Capital.
Satapathy expects bond yields to fall fast towards 7.73 percent levels in the near term.
The 10-year bond yields fell to 7.75 percent during the session, the lowest since July 28, 2010. It ended at 7.78 percent versus 7.80 percent at the previous close.
The yield fell 9 basis points for the week amidst rising hopes the central bank would have room to deliver its third cut in interest rates of the year next month.
Oil prices tumbled for a sixth straight session on Wednesday, with Brent crude falling below $98 per barrel for the first time since July as rising U.S. fuel supplies added to overall concern about global oil demand.
Gains in bond prices also found support as cash conditions improved drastically on the back of government spending. The RBI accepted all 25 bids for 490.95 billion rupees on Thursday sharply lower than a trillion rupees in deficit seen at start of the month.
The one-year overnight interest swap (OIS) fell to a session low of 7.23 percent, its lowest since Jan. 10, 2011. It closed at 7.26 percent, versus Wednesday's close of 7.27 percent.
The benchmark five-year swap rate fell to a session low of 6.96 percent, its lowest since Oct. 23, 2012. It ended steady at 7 percent.