The 10-year gilt yield fell in the day to close at 7.95 per cent, lower than its previous close of 7.99 per cent.

Special Correspondent

Complicating the matter is the rupee coming under pressure. The rupee closed at 67.51 to a dollar, down 0.56 per cent from its previous close of 67.13 to a dollar.

The rupee is tracking its Asian peers, according to Abhishek Goenka, managing director at IFA Global. He advised his importer clients to seek hedging at dips of till 67.30-67.35.

India’s foreign exchange reserves dipped $595 million to $412 billion for the week ended June 1. Reserves had peaked at $426 billion in April. “Exporters are advised to cover short-term exposure at current levels and wait for long-term forward bookings as the medium-term trend remains bullish,” Goenka said.

Bond dealers say the Reserve Bank may have bought anonymously from the secondary market, but this is difficult to confirm because data is released with a lag. Gilt yields had touched 8 per cent back in December 2014.

Nationalised banks, facing capital erosion due to their bad debt problem, are still not coming back in the bond market. And the government has met bankers earlier to convince them to return to the market.

However, banks are sitting on excess bond holding of about 8-10 per cent and have no incentive to buy bonds in a rising interest rate scenario, according to a bank treasurer.

Special Correspondent

Meanwhile The proposal on transferring non-performing assets (NPAs) of public sector banks (PSBs) to special purpose vehicles asset reconstruction companies or asset management firms, is back on the agenda.

A panel headed by Sunil Mehta, non-executive chairman, Punjab National Bank, would give recommendations in two weeks on forming asset reconstruction companies/asset management companies (ARCs/AMCs) to resolve the problem, Union Finance Minister Piyush Goyal told reporters after discussions with public sector bank heads in Mumbai.

The panel will study whether such a suggestion is good for Indian banking. If it was found useful, it would suggest ways of setting up such entities, Goyal said.

But bond dealers are not expecting a run-off in yields as of now. They expect bond yields to remain in the range of 7.80-8.10 per cent in the coming days.

But a lot depends upon how crude oil prices behave and if global yields rise. The US 10-year bond yield has started rising and is around 2.93 per cent.

Local yields are following the direction of US yields to a large extent, and had factored in a 25 basis points rate hike by the RBI.