By Archana Narayanan
MUMBAI (Reuters) - Government bonds fell on Monday, snapping four sessions of gains, after the Reserve Bank of India did not announce a bond purchase as many traders had expected after the central bank last week had said it would provide adequate liquidity.
The falls added to what was the worst quarter in nearly 4-1/2 years for bonds, hurt by a slump in the currency to record lows that sparked strong foreign investor selling and most recently by the Reserve Bank of India's surprise decision to raise interest rates.
After market hours, the central bank released data that showed India's current account deficit (CAD) was narrower than expected at $21.8 billion, or 4.9 percent of gross domestic product, in the June quarter.
Bonds are seen gaining mildly on Tuesday as a better-than-expected CAD will be positive for rupee.
On a longer horizon, strategists said debt could remain range-bound as the RBI is offsetting the rate hike by pledging to ease the tightness in liquidity and by partially rolling back some of the measures it took over July and August to raise short-term interest rates.
"The RBI's 'assurance on liquidity' last week has increased market hopes of RBI's OMO purchases of bonds and has restored market confidence that unwinding of liquidity tightening measures is on the way, helping stabilise the bond yields in the current range," said Rohit Arora, emerging market rate strategist at Barclays Capital in Singapore.
The benchmark 10-year bond yield closed 6 basis points higher at 8.77 percent, while it rose 17 basis points during the month, marking its third successive month of rise.
For the quarter, the benchmark yield vaulted 133 basis points, the most since the quarter ending March 2009.
Traders also cited the continued positive impact after the central bank assured that it would maintain adequate liquidity in the banking system, triggering expectations of bond purchases.
Total volumes on the central bank's electronic trading platform were at a high 176.20 billion rupees.
In the overnight indexed swap market, the benchmark five-year rate closed 1 bp lower at 8.35 percent, while the one-year rate ended unchanged at 8.72 percent.
(Editing by Anand Basu)