By Subhadip Sircar
MUMBAI, Feb 1 (Reuters) - Indian government bond yields rose to a near one-month high on Friday as the cash deficit in the banking system seemed likely to prolong with the government clamping down on spending in a month which will see sustained debt sales.
The government, which already has held back on spending, resulting in its cash balances with the central bank swelling, will further cut expenses.
Finance ministry officials told Reuters cuts in welfare, defence and road projects would reduce spending by about 1.1 trillion rupees ($20.68 billion) for the current fiscal year.
Finance Minister P. Chidambaram has reiterated his commitment to stick to his fiscal deficit target of 5.3 percent in the current fiscal and lower it to 4.8 percent in the next year.
The Reserve Bank of India's cash reserve ratio (CRR) cut, which will only become effective on Feb. 9, will add 180 billion rupees of liquidity in the system when the deficit is over 1 trillion rupees.
'I think the market will focus on the cash situation. Even after the CRR cut, the deficit is expected to be hover close to the 1 trillion rupee mark,' said Harish Agarwal, a dealer at First Rand Bank in Mumbai.
He, however, expects the RBI to wait for the CRR cut to take effect and resume bond purchases only in the first week of March.
The 10-year benchmark bond yield ended unchanged over Thursday's close at 7.91 percent. It rose to 7.93 percent in the session, its highest since Jan. 4.
It rose 3 basis points in the week, a second week of gains.
Volumes were low at 129.10 billion rupees as most traders were away for a bond dealers' conference at Colombo in Sri Lanka.
The benchmark 5-year overnight indexed swap , an interest derivative contract which is used to guard against changes in funding costs, rose 1 bp to 7.27 percent.
The 1-year overnight index swap (OIS) rate ended flat at 7.63 percent.
(Editing by Anand Basu) Keywords: INDIA MARKETS/BONDS
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