RBI Buys Bonds, But Index Exclusion Dims Indian Debt Rally Hopes
Overview
Indian government bonds are expected to see modest gains driven by Reserve Bank of India (RBI) purchases, but upside is capped following the unexpected exclusion from a major global index. The benchmark 10-year yield is anticipated to trade within a tight 6.60%-6.65% range. This setback dampens investor optimism despite significant buying interest from institutional categories.
Mixed Outlook for Indian Government Bonds
Indian government bonds are poised for a potentially modest upward movement on Wednesday, supported by consistent buying from key investors including the Reserve Bank of India (RBI). However, significant gains are unlikely to materialize as the market digests the unexpected exclusion of Indian debt from a prominent global index. This decision represents a setback, tempering bullish sentiment.
The benchmark 10-year government security, carrying a 6.48% coupon maturing in 2035, is projected to trade with its yield hovering between 6.60% and 6.65%. This comes after the yield closed Tuesday at 6.6277%. Traders point to substantial net buying of bonds, totaling ₹124 billion ($1.37 billion) over the preceding three sessions, from an investor pool that includes insurance companies, corporations, pension funds, and the central bank itself.
RBI's Role and Index Exclusion Impact
Analysts believe the market is becoming comfortable with the Reserve Bank of India's role as a consistent buyer, possibly replenishing holdings after a large government security matured last Friday. Speculation suggests the RBI may have acquired ₹200 billion to ₹250 billion in that maturity and is looking to reinvest. This underlying demand provides a floor for bond prices, preventing yields from falling significantly below the 6.60% mark.
Despite this domestic support, the outlook faces headwinds. Bloomberg Index Services has deferred the inclusion of Indian bonds into its flagship Global Aggregate Index. This decision, attributed to operational and market infrastructure considerations highlighted by respondents, has disappointed investors who had anticipated the inclusion, often seen as a precursor to significant foreign inflows.
External Factors and Local Rates
Separately, global oil prices continue their upward trajectory. Benchmark Brent crude futures touched a more than two-month peak, fueled by concerns over potential disruptions to Iranian crude exports. India, a major oil importer, remains sensitive to such price fluctuations, which can influence inflation expectations and monetary policy.
On the domestic interest rate front, India's overnight index swap (OIS) rates are expected to trade within a narrow band. The one-year OIS concluded Tuesday at 5.5050%, while the two-year rate closed at 5.5850%. The liquid five-year OIS rate saw a modest increase, climbing 3 basis points to settle at 5.9625%. The Reserve Bank of India is also scheduled to auction treasury bills worth ₹290 billion later this week.
