Bonds rally; RBI raises $3.3 billion in record auction

MUMBAI (Reuters) - Government bonds jumped on Thursday, recovering from two sessions of falls, after the RBI fully sold the 200 billion rupees ($3.31 billion) worth of debt on offer, accomplishing the country's biggest-ever auction.

The cut-offs for the auction were also better than expected, indicating healthy demand. Concerns about how India would accomplish the debt sale had hit bonds this week, while holidays on Monday and Friday left only three trading sessions.

Still, four dealers cited widespread market speculation that Life Insurance Corp had bought a significant chunk of the debt at the auction. Details on buyers are not publicised, and LIC was not immediately reachable for comment.

However, traders added bonds would likely remain under pressure given the debt supply will continue while investors are also likely to stay cautious ahead of the election outcome next month.

These two factors will likely remain key in the markets as the Reserve Bank of India will not set policy until early June.

"There could be some trading opportunity to make profits but I am not too sure of buying continuing because the (RBI's) monetary policy stance is still status quo and there is not much scope for the 10-year bond yield to come down further," said Mohan Shenoi, treasurer at Kotak Mahindra Bank.

The 10-year benchmark bond yield was down 8 basis points on the day at 8.88 percent, after dropping as much as 9 basis points on the day to 8.87 percent, its lowest since April 2.

Traders also suspect the RBI bought as much as 32.77 billion rupees of bonds this week after data from the electronic trading platform showed the "Others" category showing a similar amount of net purchases on Tuesday.

After Thursday's auction, 3.16 trillion rupees worth of gross borrowing remains during April-September. However, the figure may change after a government is elected next month.

Earlier today, Standard and Poor's said it may upgrade India's outlook if the government that is elected next month addresses some of the country's fiscal and economic challenges through steps such as passing a goods and services tax.($1 = 60.3550 rupees)

(Reporting by Neha Dasgupta; Editing by Rafael Nam and Anupama Dwivedi)