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

Mumbai saw a dip in demand for Indian government bonds on Monday after the Reserve Bank of India (RBI) prematurely closed its concessional swap window for foreign-currency deposits. This move, which affected a key source of bond purchases, caused a jump in yields on the benchmark 6.94% 2036 bond from 6.7909% to 6.7950% by 10:45 a.m. IST.

Despite this, traders did not anticipate the 10-year yield to exceed 6.80%, with value buyers safeguarding the 6.7950% threshold. The RBI extended the deadline for banks to utilize its concessional forex swap facility for hedging diaspora foreign-currency deposits to August 31, following inflows that surpassed $52 billion. This extension was part of a larger set of measures introduced in June to strengthen India's balance of payments.

As a result, India's foreign-exchange reserves reached a four-month peak of $707 billion by August 7, and the country's banking system now boasts a liquidity surplus that has tripled to 3.1 trillion rupees in August from nearly 1 trillion rupees in July. A private bank trader explained that the majority of FCNR(B) inflows had previously been allocated to four- to six-year bonds, which could experience significant selling pressure due to the RBI's early closure of the swap window.

Meanwhile, Brent crude prices also rose in Asian trade, approaching $90 a barrel, driven by ongoing uncertainty over US-Iran peace talks and the continued disruption of tanker traffic through the Strait of Hormuz. Traders are now eagerly awaiting the minutes of the RBI's upcoming monetary policy decision, scheduled for Wednesday, for further indications.