Mumbai: Government bonds posted their biggest weekly gain in four-and-a-half years, aided by the Reserve Bank of India's moves to support the rupee and liquidity in the market.
The benchmark 10-year bond yield fell 62 basis points over the week, the sharpest since January 16, 2009.
The 2023 bonds closed at 8.26 percent, up 3 bps on the day but off the day's highs of 8.34 percent.
"This is not a fundamental rally because it is driven by the central bank's moves and as long as that support remains, yields should not go up," said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd.
"The RBI has given the market an opening to bet on further OMO auctions," he said.
Earlier in the day, the Reserve Bank of India conducted its first purchase through open market operation (OMO) in five weeks. The move was part of a clutch of measures announced to prop up the rupee.
Bond yields fell as much as 69 bps on August 21 after the OMO announcement in the previous day, accounting for a major part of the drop this week.
The central bank said it would buy 80 billion rupees of bonds through OMO, including the 10-year benchmark 2023 bonds. The outcome of the auction was being awaited until market close.
Yields rose as much as 3 bps after the RBI announced high cut-off yields for the short-end bonds at its weekly auction of 150 billion rupees.
Earlier in the day, bonds were supported after data showed foreign institutional investors (FIIs) turned net buyers of Indian debt after three sessions. FIIs bought debt worth $267 million on August 21, data from the stock market regulator showed on Thursday.
Traders said debt redemptions in September are higher than total sales, and coupled with the redemption of the cash management bills on September 17, there will be a net infusion of cash into the banking system, adding to the positive sentiment for bonds.
In the overnight indexed swap market, the benchmark five-year rate closed down 53 bps on the week at 8.41 percent, its biggest weekly fall since mid-September 2008. The one-year rate ended down 51 bps on the week at 9.45 percent, its biggest weekly drop since early January 2009.
The five-year and one-year rates had closed at 8.48 percent and 9.58 percent on Thursday, respectively.