MUMBAI (Dow Jones)--Indian government bonds ended higher Thursday as cheer from talk of central bank measures to ease the cash crunch in the banking system mitigated an unexpected increase in weekly food prices. The most-traded 7.99% 2017 bond ended at INR100.17, higher than Wednesday's INR100.15 finish. The benchmark 7.80% 2020 bond closed higher at INR98.63, compared with INR98.48 at its previous close. Bonds slipped in midday trade as weekly wholesale price index inflation data came in higher than expected. However, economists warned against reading too much into the rise, saying that inflation was still likely to ease by the end of the fiscal year beginning April. "The central bank may extend its pause from hiking key policy rates as inflation is likely to touch the RBI's comfortable levels by December," said Shubhada Rao, chief economist at Yes Bank. "While the central bank will remain vigilant about lowering inflation, the tight liquidity conditions in the banking system are unlikely to prompt a short-term policy rate hike by the RBI," Rao added. Weekly wholesale price index primary articles rose 0.9% in the week to Nov. 13. However, the fall was mitigated by an indication from a senior government official that the central bank may take steps to help push through the government's borrowing program smoothly. Traders hoped the measures could refer to more secondary market bond purchases by the central bank, in line with similar steps in the week ended Nov. 12, when it bought a little more than INR80 billion worth of bonds. However, the official also told Dow Jones Newswires the government didn't plan to cut its market borrowing plans to help ease the cash crunch in the system, a step that some had hoped it would take. Liquidity in the system has been tight, with banks borrowing more than INR829.15 billion at the first daily liquidity auction, sparking talk of government steps to help ease the cash crunch. But bonds are likely to remain under pressure in the coming sessions if measures don't come, either from the government or the central bank, traders said. In the currency market, the Indian rupee reversed early gains against the U.S. dollar, tracking volatile Asian currencies against the greenback. The dollar was at INR45.53 late Thursday, after touching an intraday high of INR45.75, compared with INR45.70 late Wednesday. Weak local stocks capped the dollar's losses--the Bombay Stock Exchange's benchmark Sensitive Index gained 0.7% to end at 19,318.16. "The dollar was stronger in early trade due to broad overnight gains. However, the pair may see some added selling pressure now due to some custodial selling," said a dealer at a state-run bank. Traders, however, expect a bounce-back in the dollar as global risk appetite remains subdued as concerns on the fiscal health of peripheral euro zone economies continue.

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