India bonds end flat as oil drop offsets index setback

Synopsis

On Monday, Indian government bonds experienced a flat close following a day of volatility. A sharp decline in oil prices provided some respite after Bloomberg's recent decisions. The benchmark bond yield remained unchanged as traders adopted a cautious stance, awaiting the Reserve Bank of India's upcoming policy announcement this week. Recently, foreign investors have also net sold bonds using the fully accessible route.

Indian government bonds closed flat ​after volatile trading on ​Monday, as a steep fall in oil prices and rising ​flows from the central bank's dollar-inflow schemes helped soften the blow from Bloomberg's decision to defer debt inclusion.

The benchmark Indian 6.94% 2036 bond yield ended flat at 6.8343%, after ‌seesawing between 6.83% ⁠and ⁠6.89% during the day.

Bloomberg Index Services announced late on Friday that it had deferred the inclusion of Indian bonds in its flagship Global Aggregate Index, disappointing traders who were betting on the inclusion for steady foreign inflows.

Brent crude futures fell more than 7% to $83.5 in Asian trade, as hopes of a peace deal in ​the Middle East grew after Trump's latest decision to ⁠hold back ‌from military action.

Still, traders stayed cautious ahead of ​the Reserve ​Bank of India's policy decision this week, holding off positions, ⁠with some investors also parking excess funds in Treasury ​bills.

The RBI is widely expected to keep its key ​interest rate unchanged on Wednesday, according to a Reuters poll.

"Whether the MPC needs to raise rates in the second half of FY27 to keep real rates positive will be closely watched," said Alok Sharma, head of treasury at ICBC, Mumbai. "As long as oil remains below $100 a barrel, ‌the case for a rate hike appears limited."

Focus will also be on whether foreign inflows sustain after the Bloomberg index snub, ​traders said.

Foreign ​investors net sold ⁠bonds under the fully accessible route worth 54 billion rupees ($566.16 million) in the last six sessions.

Separately, the RBI received inflows worth nearly $41 billion till the end of ​July, under its schemes announced in June, which is supporting demand for bonds, traders said.

RATES

India's overnight index swap rates eased.

The one-year swap rate fell 4 bps to 5.88%, while the two-year rate pared 3.75 bps to 6.07%. The five-year OIS rate ended at 6.3650%, down 4 bps.

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