Indian government bond yields are expected to edge higher following the Reserve Bank of India’s surprise decision to wind up its concessional foreign-exchange swap window for diaspora deposits a month early, potentially weakening bond market sentiment.
Indian government bond yields are expected to edge higher on Monday after the Reserve Bank of India surprised markets by winding up its concessional foreign-exchange swap window for diaspora deposits a month early. The move is likely to weaken sentiment in the bond market, where the benchmark 6.94% 2036 security is seen trading in a 6.75% to 6.78% band, according to a Mumbai private-bank trader cited by The Hindu BusinessLine.
The central bank said on Friday that banks will no longer be able to use the zero-cost hedging facility after 31 August, rather than the original 30 September deadline. The facility was introduced to encourage foreign-currency inflows from non-resident Indians through FCNR(B) deposits, and the RBI said it had already attracted strong interest. The Hindu BusinessLine reported that inflows under the broader swap window have exceeded $52 billion, while RBI data cited by Daily Excelsior put mobilisation at $40.82 billion by 31 July, led by FCNR(B) deposits.
The scheme has been a key support for market liquidity and for the rupee, helping Indian bonds trade in a relatively narrow range through August. Traders have struggled to drive the 10-year yield decisively below the bottom of that band without a fresh positive trigger, the paper said. Kruti Chheta of Mirae Asset Mutual Fund told The Hindu BusinessLine that the early closure of the FCNR(B) swap window, along with firmer Brent crude, could weigh on sentiment. Brent rose 0.7% to $89.20 a barrel in Asian trade, as geopolitical risks kept oil supply concerns elevated.
The short-term rates market is also likely to reflect the change, with overnight index swap rates expected to ease as the policy shift removes a supportive factor. On Friday, the one-year swap ended at 5.73%, the two-year at 5.9225% and the five-year at 6.2475%, according to market data cited by The Hindu BusinessLine. Investors are now looking to the RBI’s August policy minutes, due on Wednesday, for further clues on the central bank’s thinking.
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