Federal bond prices inched lower on Friday as investors turned more cautious ahead of a key Reserve Bank of India (RBI) policy review, though expectations are still for at least a 25 basis point cut in interest rates.
The RBI reviews its policy stance on Monday with markets also expecting a potential cut in the cash reserve ratio, or the money lenders must park with the central bank.
However, some of the expectations for more aggressive rate cuts were left in doubt after the central bank governor said inflation cannot be controlled without sacrificing growth in the near-term.
His comments followed data on Thursday that showed accelerating inflation in May, although the growth in core inflation remained below the key threshold of 5 percent.
The RBI decision will follow Greek elections on Sunday, making for a potentially volatile session on Monday.
"Market expectations vary at all levels from repo cut of 25 bps, to 50 bps and CRR cut as well. But I expect only a 25 bps cut in the repo," said Paresh Nayar, head of fixed income and forex at First Rand Bank.
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The 10-year benchmark bond yield closed at 8.34 percent, up 1 basis point on the day but down 2 basis points on the week, marking the seventh straight week of falling yields.
Total volumes on the central bank's electronic trading platform were at a Rs 18,080 crore.
Bond yields have fallen 31 basis points since the last week of April, and are down 18 bps since the fourth quarter economic growth data released on May 31 fell to a nine-year low.
The weak growth raised expectations the RBI would have to shift its focus towards growth, despite its worries about inflationary pressures.
Whether that was indeed the case sparked some debate after RBI Govenor Duvvuri Subbarao addressed the growth versus inflation debate in a speech in Hyderabad on Thursday.
"You can't control inflation without sacrificing some growth," RBI Governor Duvvuri Subbarao said.
"So the message we try to convey is that this short term sacrifice of growth is a small price to pay for bringing down inflation, so that in medium term your growth is secure."
Bond investors had initially cut long positions after Subbarao's comments, but yields fell back later in the day.
India's one-year OIS rate closed 3 basis point higher at 7.54 percent while the five-year rate closed steady at 7.16 percent.
The new 10-year paper, which will soon be the benchmark, rose 1 b ps on the day and could rise to around 8.25 percent, if the RBI stays pat, according to traders.