INDIA BONDS-India bonds rise; benchmark yield ends flat after new 10-year note sale

By Dharamraj Dhutia

MUMBAI, Oct 3 (Reuters) - Indian government bonds rose on Friday as sentiment turned upbeat following a dovish central bank guidance earlier in the week, while the benchmark yield ended flat, as investors sold the note after the issue of the new 10-year bond.

The yield on the 10-year benchmark note IN063335G=CC ended at 6.5114%, after ending at 6.5166% on Wednesday.

Yields move inversely to prices.

Indian debt markets were shut on Thursday for a public holiday.

Earlier in the day the government sold a new 10-year security worth 320 billion rupees ($3.60 billion) at a cut-off yield of 6.48%, which was in line with estimates.

The new note comes after New Delhi raised the share of the 10-year bond in its October-March borrowing plan.

The 6.48% 2035 note ended at 6.4594%, with the benchmark bond witnessing a selloff after the auction result. Other bond yields dipped 1-2 basis points.

On Wednesday, the Reserve Bank of India kept its policy rate unchanged at 5.50% as expected, but said low inflation had opened up policy space for supporting growth.

The RBI reduced its inflation forecast by 50 bps to 2.6%, with Governor Sanjay Malhotra saying the ongoing tariff and trade policy uncertainties will affect external demand.

A majority of market participants now expect a rate cut in December, after a pause in August and October. The RBI has cut rates by 100 basis points since the start of the year.

"Forward guidance by the RBI lowers the bar for a rate cut in December. We retain our terminal repo rate forecast of 5.00%, with 25 bps each at the next two policy meetings," Nomura said in a note.

RATES

India's overnight index swaps (OIS) eased on Friday, as market anticipated at least one more rate cut, slated for December.

The one-year OIS rate INR1YMIBROIS=CC closed at 5.43%, and the two-year OIS rate INR2YMIBROIS=CC ended at 5.39%. The five-year OIS rate INR5YMIBROIS=CC settled at 5.6650%.

($1 = 88.7770 Indian rupees)