Indian bonds set to rise as debt switch eases borrowing, redemption pressures

Indian government bonds are likely to extend gains on Friday, after the government carried out a debt switch with the central bank that could ease redemption pressures and lower gross borrowing needs in the next financial year.

The 10-year benchmark 6.48% 2035 bond yield is likely to move in the range of ‌6.64% to ⁠6.69%, according ⁠to a private bank trader. The yield ended at 6.6833% on Thursday, down 8 basis points in the previous three sessions. Bond yields move inversely to prices.

"We should see a gap down opening in yield as this was one of the expectations of the market, which has now been fulfilled," the trader said.


New Delhi bought securities maturing in the next ⁠financial year, worth ‌755.04 billion rupees ($8.33 billion) on Thursday, while issuing 694.36 billion rupees of 8.30% 2040 bond as part of a switch operation.

Switch ⁠operations are part of the government's debt management strategy, enabling it to reduce near-term repayment pressure by exchanging shorter-maturity bonds for longer-dated securities.

The move comes ahead of a heavy maturity pipeline of 5.47 trillion rupees in 2026-27, which had driven budgeted gross borrowings to a record 17.20 trillion rupees, DBS Bank said in a note.

"More switches are expected during FY27, effectively lowering the cumulative scale of gross ‌issuance, and better support cash and debt management efforts."

Meanwhile, India's retail inflation rate accelerated to 2.75% in January, the maiden print under a revised data series showed ⁠on Thursday, returning to the central bank's target band for the first time since August.

A Reuters poll of economists had predicted the reading at 2.40%.

India's overnight index swap (OIS) rates are expected to decline further, following the drop in Indian government bond yields and U.S. Treasury yields.

The one-year OIS rate ended lower at 5.5050% and the two-year rate fell to 5.64%. The five-year OIS rate dropped 5 bps on Thursday to end at 6.09%.

($1 = 90.6030 Indian rupees)