Indian state banks to snap two-month streak of selling govt debt -traders

MUMBAI (Reuters) - Indian state-run banks are likely to resume buying government debt next year, after two months of sales, to cash in on attractive prices, especially before they start rising due to firming expectations of rate cuts, traders told Reuters.

These banks, typically the biggest buyers of government debt, have sold bonds worth 143.80 billion rupees ($1.73 billion) on a net basis so far in December, following sales of 88.4 billion rupees in November, clearing house data showed.

That was after they bought 165 billion rupees of notes in October, when the central bank said it would start open market bond sales to manage liquidity.

That news sent the 10-year benchmark bond yield surging 14 basis points (bps) in October, but the lack of any auctions since has contributed to the yield pulling back.

"There was a decent rally in the last couple of months in bonds after the October jump in yields, and this gave a profit booking opportunity," a senior treasury official at a state-run bank said.

The pullback has left the 10-year yield around 7.20%, which traders say is attractive.

"The current level is a strong entry point and we would indulge in adding at these and any higher levels," the treasury head at another state-run bank said.

The officials requested anonymity as they are not authorised to speak to the media.

The government is scheduled to raise only 2.37 trillion rupees through debt sales in January-March, sharply below the over four trillion rupees supply in each of the previous quarters.

Treasury officials plan to become more active at primary auctions, rather than indulge only in secondary purchases.

Foreign inflows too, are expected to continue amid front-running ahead of the country's debt being included in the JPMorgan index in June.

Moreover, the central bank is widely expected to start easing policy rates by the middle of the year, which is likely to push yields down further, traders said.

"Benchmark yield should not rise much from current levels," said Vijay Sharma, a senior executive vice president at primary dealership PNB Gilts.

"We expect a test of 7.10% levels in the last quarter, which leaves some room for fresh position building." ($1 = 83.2750 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Savio D'Souza)

By Dharamraj Dhutia