(Reuters) - Indian government bond yields inched higher on Friday, after easing the day before, as demand at the weekly debt auction fell short of expectations, leading to profit booking.
The benchmark 10-year yield ended at 7.2215% after ending at 7.2095%, its lowest since Sept. 15, on Thursday. The yield, however, fell eight basis points (bps) for the week, after ending largely unchanged last week.
"Benchmark bond yield at 7.20% is definitely not a level to add strong positions. And accordingly, we saw weaker bids at auction leading to a selloff in the secondary market," said Anuj Bhala, head of rates trading at SBM Bank (India).
New Delhi on Friday raised 300 billion rupees ($3.69 billion) through the sale of bonds, but the central bank sold liquid 14-year notes at six bps above market expectations.
"Some large state-run banks and long-term investors were missing from today's auction. That pushed up cut-offs, especially for the 2036 paper," a senior trader with a state-run bank said.
Market participants now await U.S. non-farm payroll data, due later in the day, which will provide further cues on the Federal Reserve's interest rate decision on Dec. 14.
Fed Chair Powell earlier this week said the U.S. central bank could ease the pace of rate hikes "as soon as December". The Fed has raised rates by 375 bps so far in 2022 to the 3.75%-4.00% range.
Market participants expect the Reserve Bank of India (RBI) to follow suit.
The RBI's monetary policy decision is due on Wednesday, and it is poised to raise interest rates by a smaller 35 bps hike to 6.25%, according to economists polled by Reuters.
Meanwhile, foreign investors and banks that have stepped up their purchase of Indian government bonds in the last few weeks may buy more in December, analysts said.
"Stability in terminal fed funds pricing has helped ease financial conditions and boosted demand for carry," said Ashish Agrawal, head of FX and EM macro strategy research, Asia, Barclays.