Indian bonds recover on replacement demand, but mood cautious

MUMBAI (Reuters) - Indian government bonds recovered most of the session's losses to end only marginally lower on Tuesday as traders used the slump as an opportunity to replenish debt holdings being depleted by hefty bond redemptions this month.

However, sentiment remained fragile after data showed wholesale price inflation accelerating to a stronger-than-expected 5.70 percent in March from a year ago.

Some of those concerns eased somewhat after data after the close of markets showed headline consumer price inflation accelerating more than expected but analysts saw core CPI remaining steady at around 7.9 percent in March.

Nonetheless, bond markets are likely to remain under pressure ahead of a 200 billion rupee ($3.32 billion) bond auction on Thursday, which markets will absorb in a holiday-shortened trading week with only three sessions.

"Market will continue to be volatile with heavy supply weighing on sentiment. However, with the entire yield curve at or above 9 percent, investors are bound to see value in bonds," said A. Prasanna, an economist at ICICI Securities, Primary Dealership Ltd.

"I expect the 10-year bond to again cross 9 percent over the next few trading sessions," he said.

The benchmark 10-year yield ended 1 basis point up at 8.95 percent, after rising as much as 9 basis points during the session to 9.03 pct.

Investors replenished debt holdings given 409.7 billion rupees worth of government debt has matured so far this month. The total bond redemptions for the month stand at 1.39 trillion rupees.

Traders will next focus on the debt auction on Thursday, as most of the bonds on offer ended at least 20 bps above the 10-year benchmark bond on the electronic trading platform, and were among the least traded.

The high yields could spark devolvement if RBI is unwilling to pay such high returns.

In the overnight swaps market, the benchmark five-year rate closed unchanged at 8.50 percent, and the one-year rate also ended flat at 8.59 percent.

($1 = 60.2350 Indian Rupees)

(Reporting by Neha Dasgupta; Editing by Anupama Dwivedi)