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Bonds edged higher on Tuesday after the central bank skipped the annoucement of a debt sale for the week on Monday, easing concerns about supply somewhat but sparking speculation it was on account of the government's high cash position.
The Reserve Bank of India, which manages the country's debt on behalf of the government, usually announces the composition of the weekly debt auctions on Monday evenings. But neither the central bank nor the finance ministry made an announcement on Monday and both have yet to explain the reason.
India this year is scheduled to borrow an average of Rs 16,000 crore ($2.51 billion) a week for the fiscal year that started in April.
Traders speculated the government could be comfortable with its cash surplus, currently at Rs 98,352 crore ($15.43 billion), and saw no need to raise more funds immediately.
Other traders said it could signal India is getting ready to unveil a new 10-year bond, while others said the government may have been uncomfortable with current yields, especially at a time of growing expectations the central bank will cut interest rates at its June 2 policy review.
"There is a lot of market speculation at this point," said a senior trader with a private bank.
"There is also talk that the government expects a rate cut in June, so will likely wait for yields to come down before issuing," he added.
The benchmark 10-year bond yield dropped as much as 3 basis points to 7.87% and was trading at 8.78% by 0430 GMT.
The uncertainty about this week's auction comes after the government opted to raise less than expected at last week's treasury bills sale after rejecting some of the bids, likely due to high yields being demanded by traders.
The underwriters at Friday's debt sale were forced to buy debt as the central bank did not want to accept higher yields being demanded by traders.
India's 10-year bond yield has risen 10 bps since mid-April, reversing part of a year-long rally, on growing worries about the impact of a retroactive tax on foreign investors and caution over a sell-off in global debt markets.
($1 = 63.7500 rupees)
