Updates at market open

By Dharamraj Dhutia

MUMBAI, Nov 25 (Reuters) - Indian government bonds rose in early deals on Tuesday, building on the previous session's rally, with dovish comments from the central bank chief bolstering expectations for a rate cut next month.

The benchmark 10-year yield IN063335G=CC was at 6.5085% as of 10:20 a.m. IST, after hitting its lowest level in two weeks at 6.5017%. It had closed 5 basis points lower at 6.5194% in the previous session. Bond yields move inversely to prices.

Reserve Bank of India Governor Sanjay Malhotra, in an interview with a local news outlet, said that there is scope to reduce policy rates further.

"At the last MPC (monetary policy committee) meeting in October, it was communicated clearly there is room to cut policy rates...Since then, the macroeconomic data we have received has not indicated that the room to lower rates has decreased," Malhotra said.

"Bulls have grown far more confident after this statement, with many market participants shifting back into the December rate‑cut camp, which is clearly being reflected in the bond market," a trader with a state-run bank said.

Sentiment was also buoyed by a further appreciation in the rupee as the currency was trading at 89.16 to the dollar, strongly above its all-time low of 89.49 hit on Friday.

Traders are also watching for the RBI's next moves on liquidity and bond yields.

The central bank bought bonds worth 272.80 billion rupees ($3.06 billion) in the first two weeks of November, but traders reckon that this was just replacement demand and not a signal on yields.

RATES

India's overnight index swap $(OIS)$ rates were trading with a receive bias after Malhotra's comments.

The one-year OIS INR1YMIBROIS=CC rate was at 5.4250%, while the two-year INR2YMIBROIS=CC rate was at 5.42%. The five-year INR5YMIBROIS=CC was lower at 5.71%, after dropping 6 bps on Monday.

($1 = 89.1350 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Sonia Cheema and Eileen Soreng)

((Dharamraj.dhutia@tr.com))