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Large inflows into the Reserve Bank of India's special deposit scheme for non-resident Indians have strengthened sentiment in India's bond market by improving expectations around banking system liquidity. The additional funds are expected to support demand for government securities while also boosting confidence in the country's external position amid volatile global oil prices. The rupee strengthened alongside bond prices, while investors continued to monitor geopolitical developments and awaited clarity on the possible inclusion of Indian government bonds in Bloomberg's Global Aggregate Index.
India's government bond market traded higher in early deals on Tuesday after stronger-than-expected inflows into the Reserve Bank of India's (RBI) special deposit programme for non-resident Indians improved expectations of liquidity in the domestic banking system. The additional liquidity is expected to increase the availability of funds for investments in government debt, supporting demand in the bond market.
Data released by the RBI late on Monday showed that India had attracted nearly USD 17.4 billion through its special deposit programme for non-resident Indians. The inflows exceeded market expectations and were viewed positively by bond market participants.
Kruti Chheta, Mumbai-based fund manager and fixed income analyst at Mirae Asset Investment Managers India, said the initial inflow numbers appeared encouraging and were expected to improve liquidity conditions in the banking system. She added that stronger liquidity should support demand for government bonds and improve demand-supply dynamics in the debt market.
Market participants also believe the fresh overseas deposits will strengthen confidence in India's balance of payments position at a time when global crude oil prices remain volatile due to geopolitical uncertainties.
India's benchmark 6.94% 2036 government bond yield declined 1.5 basis points to 6.7616% by noon. Bond yields move inversely to prices, meaning lower yields indicate higher bond prices.
The Indian rupee also strengthened, rising 0.21% to 96.24 against the US dollar, reflecting improved investor sentiment following the deposit inflows.
Global crude oil prices provided additional support to the market. Brent crude declined 0.6% to USD 88.63 per barrel, easing concerns for India, which remains the world's third-largest importer and consumer of crude oil. Lower oil prices generally reduce inflationary pressures and help improve India's external account.
The positive sentiment came despite fresh geopolitical concerns. In the past week, Yemen's Iran-backed Houthi group threatened a naval blockade on Saudi Arabia, raising concerns over possible disruptions to global energy supplies and international trade routes.
DBS Bank, in a recent market note, observed that India's 10-year government bond yield had remained relatively resilient despite rising geopolitical tensions and elevated crude oil prices. The bank said it viewed 6.70% as the likely lower limit for the benchmark yield under current market conditions.
Investors are also awaiting a decision on whether Indian government bonds will be included in Bloomberg's Global Aggregate Index, a development that could attract additional foreign investment into the country's debt market. Expectations surrounding global bond index inclusion have remained a key driver of overseas interest in Indian government securities over the past year.
Foreign portfolio investors have purchased USD 4.30 billion worth of Fully Accessible Route (FAR) government bonds since the beginning of June, supported by favourable tax treatment and continued optimism over India's inclusion in major global bond indices.
In the interest rate derivatives market, overnight index swaps also eased as sentiment improved alongside stable crude oil prices. The one-year swap rate stood at 5.93%, the two-year rate was 6.1075%, and the five-year rate was 6.3925%, with all three declining by 1-2 basis points during early trading.
Source Reuters
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