MUMBAI: Federal bond yields fell on Tuesday on hopes the government will unveil more fiscal measures and stand its ground to political allies pushing for a rollback in recent action, thus raising the prospects of a rate cut in October. Finance minister P. Chidambaram said on Monday the government will take additional fiscal measures by Oct. 30 for more fiscal consolidation and called on the central bank to take more 'supportive measures' at its next policy review. Despite data on Tuesday showing annual consumer price inflation picked up in August to 10.03 percent, investors believe a renewed government commitment to fiscal reforms could sway the Reserve Bank of IndiaBSE 5.39 % into cutting the repo rate. "Despite higher WPI and CPI numbers, the expectations of rate cut for October is building up post the finance minister's reform assurance," said Paresh Nayar, head of fixed income and forex and First Rand Bank. The benchmark 10-year bond yield fell 1 basis point to 8.17 percent. The central bank disappointed investors on Monday by leaving interest rates unchanged on Monday despite big-ticket reforms by the government last week, saying its primary focus remained fighting inflation. However, continued government reforms could change that picture, as they would signal a commitment to containing the fiscal deficit, projected at 5.1 percent of GDP for fiscal 2013, while helping narrow India's record current account deficit. Bonds are also likely to remain supported by improved liquidity after the RBI cut the cash reserve ratio, with an expected 170 billion rupees to be released on Saturday. OIS rates fell, with the 1-year OIS rate fell 2 bps to 7.70 percent, while the 5-year OIS fell 4 bps to 7.17 percent.

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