Indian government bonds see decline today: What's the reason?
What's the story
The demand for Indian government bonds witnessed a decline today, following the Reserve Bank of India's (RBI) unexpected early closure of its concessional swap window for foreign-currency deposits. This move has led to a spike in the benchmark bond yield, disrupting an important demand driver. The yield on the benchmark 6.94% 2036 bond jumped by 3.5 basis points to 6.7909% today.
Market response
Traders optimistic about 10-year yield stability
Despite the spike, traders are optimistic that the 10-year yield won't exceed 6.80%, with value buyers safeguarding at 6.7950%.
The RBI had recently advanced the deadline for banks to access its concessional forex swap facility for hedging diaspora foreign-currency deposits after inflows exceeded $52 billion.
Lenders now have until August 31 to utilize this zero-cost hedging facility.
Reserve growth
Liquidity surges to ₹3.1T
The inflows have also boosted India's foreign-exchange reserves to a four-month high of $707 billion as of August 7.
Meanwhile, the surplus in the banking system's liquidity has tripled to ₹3.1 trillion in August from nearly ₹1 trillion in July.
A private bank trader noted that most FCNR(B) inflows were directed toward four- to six-year bonds, which may face heavy selling pressure due to the premature closure of the swap window.
Rate increase
Overnight index swap rates spike, impacting market sentiment
Following the early closure of the swap window, India's overnight index swap rates have shot up.
The one-year swap rate rose by five basis points to 5.78%, while the two-year rate increased by 6.25 basis points to 5.9850%.
The five-year rate also saw a rise of 7.75 basis points, hitting 6.3250%.
This sharp increase in overnight index swap rates has further fueled selling in bonds and impacted market sentiment negatively.