Also, doubts about the government's intention to stick to the fiscal consolidation roadmap surfaced after local news agency Cogencis reported on Wednesday that finance ministry officials were debating a fiscal deficit target of 4 percent of gross domestic product for 2015/16 to spur public spending.
The Indian rupee continued its fall against the dollar for the third straight session on month-end dollar demand and profit-booking by foreign investors ahead of the end of the year.
"Because of year-end not too many people were willing to add positions. There was some selling by FIIs (foreign institutional investors) which led to dollar outflows," said Anoop Verma, vice-president in treasury at Development Credit Bank in Mumbai.
Volumes were thin in the holiday-shortened week, and traders expect bonds and the rupee to rise only in the first week of January.
Bonds and the rupee are expected to remain under pressure next week until foreign investors start allocating funds in India, traders said.
The partially convertible rupee closed at 63.5575/5675 per dollar after falling to a low of 63.70 earlier in the day.
It had closed at 63.5150/5250 on Wednesday.
The benchmark 10-year bond yield touched 7.9997 per cent, its highest since Dec. 17, and closed 2 basis points higher at 7.98 per cent.
It traded in a band of 7.9544-7.9997 per cent.
In the overnight indexed swap market, the benchmark five-year swap rate closed flat at 7.29 percent, while the one-year rate fell 2 bps to 7.86 per cent.
Should RBI let the rupee depreciate further?
Yes, the rupee IS overvalued
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