India bonds dip as RBI's diaspora swap move dents sentiment

Early Monday saw a downturn in demand for Indian government bonds after the Reserve Bank of India (RBI) prematurely closed its concessional swap window for foreign-currency deposits, impacting bond purchases. The yield on the benchmark 6.94% 2036 bond surged 3.5 basis points to 6.7909% by 10:45 a.m. IST, as bond yields inversely correlate with prices.

Despite this, traders predicted the 10-year yield would not surpass 6.80%. The RBI had extended the deadline for banks to utilize its concessional forex swap facility for hedging diaspora foreign-currency deposits, with a final cut-off of August 31. This swap facility was part of a package of measures introduced in June to strengthen India's balance of payments.

Inflows from this facility have bolstered India's foreign-exchange reserves to a four-month peak of $707 billion, and the banking system's liquidity surplus has tripled to 3.1 trillion rupees in August from nearly 1 trillion rupees in July. A significant portion of FCNR(B) inflows had been directed towards four- to six-year bonds, which may experience strong selling pressure due to the early swap window closure.

Brent crude prices also rose in Asian trade, nearing $90 a barrel, driven by uncertainty over US-Iran peace talks and ongoing disruption in tanker traffic through the Strait of Hormuz. Traders are now anticipating the RBI's monetary policy decision minutes, scheduled for release on Wednesday, for further insights.