Bonds snap 3 weeks of losses; RBI reiterates OMO assurance

By Archana Narayanan

MUMBAI (Reuters) - Government bonds posted their first weekly gain in four, drawing comfort from a strong recovery in the rupee and after the Reserve Bank of India (RBI) said it would purchase bonds to provide liquidity support.

The bond market started the month with a positive note after a tough September marked by worries about the rupee and the current account deficit. This was exacerbated after the RBI unexpectedly raised interest rates, although it partially brought down short-term interest rates.

However, sentiment turned bullish after the RBI said it would keep liquidity adequate. Reiterating its stance, RBI Deputy Governor H.R. Khan said on Friday the central bank will conduct more bond purchases via open market operations if needed.

The RBI is set to buy up to 100 billion rupees via OMOs on Monday, its first such purchases since August 30.

"Easing of rates in the near term has been a direct outcome of liquidity support assured by the RBI," said Rudraksh Bhatt, vice president at Darashaw and Company.

"Clear guidance by the regulators for the markets coupled with a sharp recovery in rupee has helped debt gain," Bhatt added.

The benchmark 10-year bond yield closed 3 basis points lower at 8.61 percent on Friday. Yields fell 10 bps this week after three straight weeks of rise.

A stronger rupee also supported bonds, as the dollar was pinned at an eight-month low with no clear progress in U.S. budget talks.

Total volumes on the central bank's electronic trading platform were at a high 373 billion rupees.

In the overnight indexed swap market, the benchmark five-year rate closed 5 bps lower at 8.24 percent, while the one-year rate ended 3 bps lower at 8.64 percent.

(Editing by Subhranshu Sahu)