By Swati Bhat
MUMBAI (Reuters) - Government bond yields ended little-changed on Monday, ending their worst month in seven as the violence in Iraq has threatened to push up global crude oil prices and lead to a spike in domestic inflation.
India imports two-thirds of its oil needs and higher global crude prices can push up the current account deficit while also increasing the government's subsidy burden and pressuring inflation higher.
These concerns have stopped a rally which started in May spurred by optimism that the election of Narendra Modi as prime minister would usher a period of economic reforms, which culminated with the benchmark 10-year bond yield hitting a four-month low on June 6.
Still, although the 10-year yield rose 10 basis points in June, its biggest monthly rise since November, it still fell 6 bps in the April-to-June period, which was the best quarter for bonds since the June quarter of 2013.
Dealers expect investors to remain on the sidelines ahead of the new government's budget which will be unveiled on July 10 and the wholesale and consumer inflation indicators later this month, although analysts see opportunistic buying as well.
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"There was some quarter-end buying seen earlier today and some value buying as well. The CPI/WPI releases, apart from the budget could give a positive trigger for bonds," said Bekxy Kuriakose, head of fixed income trading at Principal PNB Asset Management.
The benchmark 10-year bond yield ended down 1 basis point at 8.74 percent.
Yields had initially fallen after Brent crude oil dropped below $113 a barrel on Monday as fears of a disruption to oil output from Iraq receded.
But they rose 3 bps at one point after domestic news agency Cogencis reported the RBI had indicated to some banks it would reduce the limit on held-to-maturity bond requirements, citing "industry sources".
Volumes in the bond market stood at 190.95 billion rupees ($3.17 billion). Though quarterly average volumes are still just about a third of their peak, the June quarter saw the highest average quarterly volume in a year at about 380 billion rupees.
In the overnight indexed swap market, the benchmark 5-year swap rate closed down 2 basis points at 7.89 percent, while the 1-year rate ended 1 bp lower at 8.36 percent.
($1 = 60.1700 rupees)
(Editing by Prateek Chatterjee)