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

Demand for Indian government bonds weakened early on Monday after the Reserve Bank of India unexpectedly closed its concessional swap window for foreign-currency deposits ahead of schedule, cutting a key source of demand for bond purchases.

The yield on the benchmark 6.94% 2036 bond jumped 3.5 basis ‌points to ⁠6.7909% ⁠by 10:45 a.m. IST. Bond yields move inversely to prices.

Still, traders said the 10-year ​yield was unlikely to rise above 6.80%, with value buyers protecting 6.7950%.


The RBI ​on Friday advanced the deadline for banks to access its concessional forex swap facility for hedging diaspora foreign-currency deposits, after inflows surpassed $52 billion. Lenders now have ​until August 31 to use the ⁠zero-cost hedging facility.

The swap ‌facility was part of a broader package ​of measures announced ​in June to bolster India's balance of payments. ⁠The inflows have also helped lift India's foreign-exchange reserves to a ​four-month high of $707 billion as of August 7.

India's ​banking-system liquidity surplus has also tripled to 3.1 trillion rupees in August from nearly 1 trillion rupees in July.

"Most FCNR(B) inflows had gone into four- to six-year bonds, which could face strong selling pressure because of the early closure of the swap window," a private-bank ‌trader said.

Brent crude also edged higher in Asian trade, nearing $90 a barrel as uncertainty over U.S.-Iran peace talks ​persisted and tanker traffic ​through the Strait ⁠of Hormuz remained disrupted.

Traders now await minutes of the RBI's August monetary policy decision due on Wednesday for fresh cues.

RATES

India's overnight index swap ​rates rose sharply after the early closure of the swap window, which also amplified selling in bonds, traders said.

The one-year swap rose 5 bps to 5.78%, the two-year rate was up 6.25 bps at 5.9850%, and the five-year rate gained 7.75 bps to 6.3250%.