Bond yields fell for the second straight day in the Indian market on Monday as traders took comfort from the central bank's unexpected decision to cancel a scheduled sale of bonds via open market operation (OMO) post market hours on Friday.

The bond market, which got a shot in the arm on Friday afte r Moody's upgraded India's sovereign rating pared almost all the gains on that day, resumed the rally on Monday boosted by the cancellation of OMO sale which to traders was a signal that the central bank was not happy with high yields.

The Reserve Bank of India had said on Friday it was withdrawing the OMO sale that was scheduled for November 23 due to “recent market developments and based on a fresh review of the current and evolving liquidity conditions".

“It is definitely a yield signal even if they say that it is due to evolving liquidity situation because no drastic change has happened in liquidity,” said the chief dealer at a large state-run bank.

“We have always been saying there is no reason for bonds to be so negative as fiscal slippage is unlikely to be very high and inflation won't shoot through the roof.”

As of 0454 GMT, the benchmark 10-yr bond yield fell to as much as 6.92 per cent, lowest since November 10. It had closed at 7.05 per cent on Friday. Meanwhile the rupee weakened to 65.11 to the dollar from the previous close of 65.02 as the greenback gained on concerns of political uncertainty Germany.

Back home, the two-day bond rally has been a much-awaited relief for several investors who are sitting on large piles of losses after bond yields rose as much as 58 basis points since June-end as rate cut hopes waned on high inflation and potential fiscal slippages.

However, many traders expect this rally to fizzle out as concerns over rising inflation, hawkish central bank rhetoric and fiscal discipline resurfaces.

“How long and how much can the RBI signal on bond yields? Eventually inflation will rise post April to around 5 percent and then market will be expecting a rate hike,” said a market participant at a primary dealership.

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