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

Synopsis

Early Monday saw a dip in demand for Indian government bonds following the RBI's closure of its swap window. This decision caused the benchmark bond yield to surge, hindering a crucial source of demand. Inflows exceeding $52 billion resulted in foreign exchange reserves hitting a four-month peak. Additionally, the surplus of banking system liquidity saw a threefold increase, while swap rates escalated.

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.

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%.

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