By Subhadip Sircar
MUMBAI (Reuters) - Government bonds rose the most in over three years on Thursday, snapping three days of losses, as the central bank paid high yields in its sale of short-end bills, signalling its resolve to bolster the rupee by draining liqudiity.
The Reserve Bank of India, through two successive sales of bills in as many days at yields of over 11 percent, reinforced expectations of bond dealers that it would walk the talk in ensuring short-term rates remain high as the central bank tries to curb rupee speculation.
The RBI walks another tightrope on Friday when it auctions 150 billion rupees of government bonds.
Investors will demand high yields, while the RBI would have to keep the government's borrowing costs manageable to help meet the fiscal deficit target of 4.8 percent of GDP for the financial year ending March 2014.
Demand could be weak, given that call rates have risen since the RBI's additional measures on Tuesday to drain cash. The rate is expected to spike next week when some of those steps kick in.
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"The bond gains have primarily been on the rupee rally to past 59 to a dollar. However, with the call rate likely to shoot up over 10 percent from next week, sentiments will be weak at the auction tomorrow as those who buy the bonds will have a negative cost of carry," said Baljinder Singh, a senior dealer with Andhra Bank.
The benchmark 10-year bond yield fell 23 basis points on the day to 8.19 percent, its biggest single day fall since May 13, 2010 as per Thomson Reuters data.
It traded in a wide 8.19-8.48 percent band in session. Volumes remained low at 169.85 billion rupees.
Yields have risen 64 basis points since the RBI initiated the current tightening steps on July 15.
India sold about 52 billion rupees of 28-, 56-day cash management bills, lower than the target of 60 billion rupees.
The one-year rate rose to a near five-year high early in the session, before closing 16 bps down at 9.31 percent. The benchmark five-year OIS rate closed down 15 basis points at 8.28 percent.
(Editing by Prateek Chatterjee)