MUMBAI, May 18 (Reuters) - Indian government bond yields were trading marginally higher early on Thursday, as traders lightened their positions ahead of the debt auction on Friday, while the benchmark yield remained below the crucial 7% mark.
The 10-year benchmark 7.26% 2033 bond yield was at 6.9713% as of 10:00 a.m. IST, after closing at 6.9661% in the previous session.
It seems the market is now in a consolidation zone and the next leg of the rally, if at all it happens, would depend on demand at current levels, a trader with a private bank said.
New Delhi seeks to raise 330 billion rupees ($4.04 billion) through a bond auction, including 140 billion rupees of the benchmark paper.
Bond yields have been declining for a few days, pushing the benchmark yield under the 7% handle comfortably, amid a drop in retail inflation and as Russian firms buy government bonds.
Russian banks and companies that have trade surpluses with Indian lenders are using those funds to invest in government debt, said Sunil Mehta, head of the Indian Banks' Association.
India's headline retail inflation declined to an 18-month low of 4.7% in April and some economists expect a further fall towards 4% in May, a level last seen in January 2021.
This has further cemented bets of a prolonged pause on interest rates by the Reserve Bank of India after it surprised markets with a status quo in April, against expectations of a 25-basis point hike. The next policy decision is due on June 8.
Meanwhile, market sentiment also remains positive as traders await the imminent transfer of surplus funds from the RBI to the government.
Many market participants expect this amount to be higher than 1 trillion rupees, well above the government's budget of 480 billion rupees. ($1 = 81.7800 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
