India Bonds Up, Choice Of Notes On Auction Cheers; Rupee Down .

MUMBAI (Dow Jones)--Indian government bonds traded higher Tuesday as the choice of bonds at the weekly debt sale boosted market confidence in the central bank's ability to manage the government's massive borrowing program without forcing yields higher.

The 7.80% 2020 bond ended at INR98.99, up from Monday's INR98.71 close.

"The Reserve Bank is clearly spreading all fresh supply between all three papers in the 10-12 year bucket, which should help ease supply concerns on any one of those notes," said the trading head of a primary dealership.

Late Monday, the Reserve Bank announced that it would sell INR40 billion of the 8.13% 2022 bond this week at the INR110 billion auction. This came a week after the auction of another 12-year note, the 8.08% 2022 bond.

Most traders had expected the 10-year bond to be sold this week, in keeping with the recent pattern of alternating between the two most popular notes.

The choice of the 8.13% 2022 bond this week bolstered the view that the move to add a second 12-year bond to the weekly bond sales was a conscious decision to blunt the weight of the steady supply on the benchmark, and 8.13% 2022 notes.

But with the next rate-setting meeting just over a week away, traders may not want to go overboard with the optimism. The RBI will meet on Sept. 16 to fix rates at its mid-quarterly monetary policy review.

Many participants will be watching the monthly industrial output and inflation data due over the next week before taking a medium-term call on bonds. Till then, any rally may face headwinds from wary traders looking to hedge against surprises from the data.

In the currency market, the Indian rupee slipped against the U.S. dollar as importers chased the greenback as a weak euro outweighed the cheer from upbeat local stocks.

The dollar was at INR46.84 late Tuesday, compared with INR46.54 Monday.

"Some people had perhaps thought that the dollar was set to slip past its key INR46.42 support. When the greenback turned higher today globally they had to cover their short dollar positions," said a trader with a foreign bank.

The dollar gains came despite upbeat local stocks. The Bombay Stock Exchange's Sensitive Index added 85.01 points, or 0.5%, to finish at 18,645.06, its highest level since February 2008.

Most traders expect the rupee to continue to remain sluggish despite the strength of stocks in recent weeks. Few expect the dollar to slip below INR46.20.

Source : online.wsj.com