INDIA BONDS-Aggressive RBI measures hand India bonds a ninth weekly loss

By Khushi Malhotra

MUMBAI, Oct 16 (Reuters) - Indian government bonds nursed losses for a ninth straight week, battered by the Reserve Bank of India's rupee defence, which has sharpened its tightening bias, clouded the policy outlook and sapped demand for debt.

The benchmark 6.94% 2036 bond yield rose around 8 basis points this week to 7.3789%, extending its nine-week climb to over 62 bps.

The RBI doubled down on rupee support this week, while also draining excess liquidity through open-market sales, bruising bond market sentiment.

Higher inflation and the RBI's push to arrest the rupee's slide have raised bets of a larger December rate hike, lifting short-end yields and swap rates. The yield on the 6.36% 2031 note has risen 18 bps this week.

The RBI governor also said on Tuesday that while the central bank does not generally use monetary policy to safeguard financial stability, the two cannot be fully separated.

"RBI comments suggest that inflation is no longer the sole driver of monetary policy decisions. If global conditions remain stressed, more measures against speculation and targeting BOP flows are likely to be announced," Nomura said in a note.

The central bank is expected to tighten financial conditions further to stem capital outflows and raise the cost of shorting the rupee, sources and analysts told Reuters.

Traders also fear the RBI may tolerate higher bond yields to preserve the spread over US rates. The premium on India's 10-year yield over its US counterpart widened to 227 bps this week from 206 bps a week earlier.

The market faces a further drag from duration-heavy central and state borrowing calendars.

Easing US Treasury yields offered some relief, with the 10-year yield down over 13 bps this week at 5.11%, heading for its best week since the Iran war began in February.

RATES

India's overnight indexed swap curve flattened sharply, with the 1-year rate posting its biggest weekly rise this financial year.

The one-year OIS rose 32 bps to 6.56%; the 2-year surged 18 bps to 6.6225%; and the 5-year added 6 bps to 6.7875%.

($1 = 95.0550 Indian rupees)