Mumbai: Government bonds posted their best monthly gain in 18 months on hopes easing inflation would allow the country`s central bank to start trimming key policy rates earlier than expected.
The gains came on a day when the Bank of Japan surprised financial markets by significantly expanding its massive stimulus programme, reigniting hopes the global liquidity situation would continue to remain easy.
The 10-year bond yields have fallen 24 basis points this month, its steepest since May 2013, on strong demand from foreign investors and continued expectations of a rate reduction.
Foreign portfolio investors into Indian debt have bought nearly $2.8 billion so far in October.
"We believe inflation will soften in December, although a spike during Jan to March cannot be ruled out," said Soumyajit Niyogi, analyst, interest rate, SBI DFHI, a primary dealership in Mumbai.
"We expect a rate cut in early 2015, although one in December cannot be ruled out."
Fall in global oil prices also helped sentiment. Brent crude oil fell more than a dollar towards $85 a barrel on Friday as a firmer dollar and a well-supplied oil market pushed the benchmark towards its steepest monthly decline since 2012.
The benchmark 10-year bond yield closed at 8.28 percent on Friday after hitting 8.25 percent, a low it had touched on Aug. 22, 2013. The yield ended at 8.29 percent Thursday.
India`s five-year swap rate ended steady at 7.50 percent, while the one-year rate fell 2 basis points to 8.08 percent.
