Dec. 7 (Bloomberg) -- India's 10-year bonds advanced, snapping two weeks of losses, on speculation spending by the government and purchases of securities by the central bank will leave banks with more cash to buy debt.

The yield on the benchmark note was at the lowest in a month after a government report today showed inflation unexpectedly slowed to near a five-year low. The rate at which banks lend to each other overnight, which gauges the availability of funds in the banking system, dropped to the lowest in two weeks.

``Better liquidity conditions and the support from the central bank have been providing some comfort to bonds,'' said Parthasarathi Mukherjee, treasurer at Axis Bank Ltd. in Mumbai. ``We have seen only buyers in the few trades that have happened.''

The yield on the 7.99 percent note due July 2017 declined 4 basis points this week, or 0.04 percentage point, to 7.87 percent at the 5:30 p.m. close of trading in Mumbai, according to the central bank's trading system. The price rose 0.26, or 26 paise per 100-rupee face amount, to 100.78.

The overnight call-money rate fell as low as 3.25 percent, the least in 10 weeks, before closing at a two-week low of 4.75 percent, data compiled by Bloomberg show. A lower rate reduces the cost of buying debt with borrowed funds.

Inflation eased to 3.01 percent in the week ended Nov. 24 from a year earlier, from 3.21 percent in the previous seven-day period, the Ministry of Commerce & Industry said in a report. The median estimate in a Bloomberg News survey of economists was for a 3.22 percent rate.

Inflation, Rates

Cooling inflation may keep the central bank from raising interest rates and help preserve the value of debt's fixed payments.

``The market is cautious on the interest-rate outlook,'' Mukherjee said. ``It isn't clear if the rates will start declining, but we can assume there's no need to increase rates from here on.''

Central bank Governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered lenders to set aside more cash four times since December last year.

To contact the reporter on this story: Sam Nagarajan in New Delhi at samnagarajan@bloomberg.net.

Last Updated: December 7, 2007 07:46 EST