Indian Govt Bonds Fall On Improved Risk Appetite; Rupee Gains .

MUMBAI (Dow Jones)--Indian government bonds fell sharply Friday, weighed by weak demand at a government bond auction and as investors favored riskier assets following the progress on the resolution of the euro zone's debt crisis.

The benchmark 7.80% 2021 bond fell to INR93.40 from Tuesday's closing level of INR93.91.

Local currency and bond markets were closed Wednesday and Thursday due to public holidays.

At Friday's auction, bond underwriters had to pick up INR1.49 billion of securities as they remained unsold due to weak demand.

"The devolvement has weakened sentiment. Progress on the European debt crisis has anyway increased the appetite for riskier assets such as stocks," said N.S. Venkatesh, treasury head at IDBI Bank.

On Thursday, European leaders reached an agreement with private banks on a 50% reduction of Greece's debt in the hands of private investors and also agreed to expand the firepower of the euro zone's bailout vehicle.

Government bonds had rallied Tuesday after the Reserve Bank of India raised its policy rate by an expected 25 basis points, but signaled an imminent end to its rate-tightening cycle as inflation is expected to ease.

However, some of the cheer was dissipated by high food inflation figures released Thursday.

Food inflation in the week to Oct. 15 accelerated to a more-than six-month high of 11.43%, compared with 10.60% in the previous week.

In a research note, Barclays Capital said it expects 10-year government bonds to trade in a range of 8.65%-8.90% in the near term as supply pressures continue. "A respite will likely only come from RBI open-market operations or increases in FII (foreign institutional investor) limits," the house said.

In the currency market, the Indian rupee rose sharply, tracking a surge in local stocks on the back of the euro zone's bailout plan.

The dollar was at INR48.75 in late trade, down from INR49.50 late Tuesday.

However, trading volume was low as many dealers were away due to the shortened week and because most importers had covered their payments Tuesday, said a dealer at a foreign bank.

The Bombay Stock Exchange's Sensitive Index jumped 3.0% to 17,804.80 Friday.

Source : online.wsj.com