Government bonds extended losses to a third session on Friday as dealers fretted over how the government would meet its budgeted fiscal deficit target as another indicator suggested that the slowdown in the economy was more pronounced.
Factories cut production in October, with overall manufacturing activity contracting for the third straight month as order books shrank at a quicker pace, a survey private showed on Friday.
The reading was in stark contrast to other Asian economies which showed the fastest expansion in multiple months.
The slowing economy, along with still-elevated price pressures, poses a serious challenge to governor Raghuram Rajan, who has already raised key interest rates twice in two months.
The fiscal deficit remains a matter of concern as government data showed on Thursday it was 4.12 trillion rupees ($67.22 billion) during April-September, or 76% of the full-year target.
"We remain concerned on potential fiscal slippage. Hence there are two options at hand to meet the end-year challenging targets - cutback spending or delay some allotments to the next fiscal year," said Radhika Rao, economist at DBS.
The benchmark 10-year bond yield closed 8 bps higher at 8.70%. Yields rose 12 bps for the week, a third week of gains.
In the absence of any further cues, the market is concentrating on the auction supply. The government sold 140 billion rupees of bonds in the session, in-line with expected cutoffs.
The benchmark five-year swap rate closed 3 bps higher at 8.21 %, while the one-year rate ended 2 bps up at 8.41%.