India bonds gain as RBI FX inflows lift liquidity, spur short-term debt buying

Indian government bonds rose in early trade on Thursday, led by the shorter-duration papers, after larger-than-expected dollar inflows under the central bank's special schemes boosted rupee liquidity and improved sentiment for Indian assets.

The yield on the benchmark 6.94% 2036 bond was at 6.9502% as of ‌10:30 a.m. ⁠IST, ⁠after closing at 6.9754% on Wednesday.

The five-year 6.36% 2031 bond yield dropped 8 bps ​to 6.48%.


India attracted a much larger-than-expected $136.38 billion through special foreign-currency mobilisation schemes, strengthening its ​ability to support the rupee while adding to domestic liquidity.

Indian banks raised $127.23 billion through non-resident foreign-currency deposits, with additional inflows coming through external commercial ​borrowings and overseas foreign-currency borrowings.

The majority of these ⁠funds would ‌remain in the system for three to five ​years and ​could boost demand for five-year securities, especially from foreign ⁠banks with limited retail lending operations, traders said.

India's banking ​system liquidity surplus jumped to 9.7 trillion rupees ($102.76 billion) ​as most banks have swapped their dollars inflow with the central bank.

Kotak Mahindra Bank said concerns that the Reserve Bank of India would need to aggressively sterilise the liquidity surplus may be overstated.

It expects the RBI to rely more on short-term liquidity management tools, including ‌sales of bills with four- to five-month maturities.

However, elevated oil prices and U.S. Treasury yields continued to weigh on ​demand for ​longer-dated bonds.

Benchmark Brent ⁠crude contract hovered around $95 per barrel amid concerns over supply disruption.

A sustained rise in energy prices could worsen major importer India's inflation outlook and ​strain government finances.

RATES

India's overnight indexed swap rates plunged across the curve as the liquidity surplus triggered receiving interest.

The one-year rate was at 5.96%, while the two-year rate was at 6.16%. The most liquid five-year rate declined 7 bps to 6.46%.