Bonds rally on RBI bond purchase, UDAY clarification

By Neha Dasgupta

MUMBAI (Reuters) - Indian bonds rallied on Friday after the Reserve Bank of India (RBI) announced a $1.75 billion bond purchase and said it would not allow bailout debt issued by state governments to boost supply and hurt markets.

The benchmark 10-year bond yield was down 2 basis points at 7.84 percent, after falling as much as 10 basis points earlier.

The central bank's bond purchase plan and assurance took pressure off bonds as the market braced for the government to announce a higher-than-expected fiscal deficit target and increased borrowing in its 2016/17 budget due to be unveiled on Monday.

"Some of these measures will give temporary relief," said Ashish Parthasarthy, treasurer at HDFC Bank.

"What will play a bigger role would be what kind of supply will come next year from the centre and especially from states," he said.

The gains in bond markets come after the Reserve Bank of India said it would purchase bonds up to 120 billion rupees ($1.75 billion) through open market operations (OM0) on March 3. It will announce details of maturities at a later date.

This is a second such purchase in less than three weeks after banks clamoured for relief from persistent liquidity shortages.

Separately, on Friday, the central bank also said debt from state governments under the Ujwal Discom Assurance Yojana or UDAY scheme to banks would be through a private placement, effectively keeping the bonds out of the markets.

The government is pushing states to take over 75 percent of the debts of their utility companies over two years, which swelled to 4.3 trillion rupees after years of undercharging customers for electricity.

($1 = 68.7000 Indian rupees)

(Editing by Rafael Nam)