Indian bonds are expected to open weaker after the Reserve Bank of India shortened the window for diaspora deposit swaps, with rising oil prices adding to market uncertainty and potential inflationary pressures.
Indian government bonds are likely to open weaker on Monday after the Reserve Bank of India moved to end a concessional foreign-exchange swap window for diaspora deposits earlier than planned, denting market sentiment just as oil prices firmed. Traders said the benchmark 6.94% 2036 bond could trade in a 6.75% to 6.78% yield range, compared with Friday’s close of 6.7578%.
The central bank said on Friday that banks would no longer be able to use the zero-cost hedging facility after August 31, rather than September 30, after drawing robust inflows of more than $52 billion. That tally is well above earlier expectations, with market reports in July suggesting the scheme had already attracted nearly $21 billion and could ultimately draw $60 billion to $70 billion. Indian banks raised more than $17 billion from overseas within weeks of the facility’s launch in June, underscoring how strongly non-resident depositors responded to the offer.
The early closure of the window may trim one source of support for domestic fixed income. In August, Indian bonds had traded in a narrow band as FCNR(B) inflows helped improve banking-system liquidity and the RBI maintained a relatively dovish policy tone. The benchmark 10-year yield has been trapped in a tight 6.75% to 6.79% range, with traders waiting for a fresh catalyst, including minutes of the RBI’s August policy meeting due on Wednesday.
Oil is another pressure point. Brent crude rose 0.7% in Asian trade to $89.20 a barrel as uncertainty persisted over US-Iran talks and tanker traffic through the Strait of Hormuz remained disrupted. Higher crude tends to worry Indian bond investors because it can worsen inflation and weaken the country’s external balances, while also complicating the outlook for interest rates. Overnight index swap rates are also expected to soften, with the one-year swap ending Friday at 5.73%, the two-year at 5.9225% and the five-year at 6.2475%.
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