Indian government bonds ended little changed on Friday, halting a strong six-week upward trend that has seen the benchmark 6.94% 2036 bond yield fall to 6.7108% from 6.7180% on Thursday. According to The Economic Times, the 10-year bond yield dropped 6 basis points in the week, bringing the aggregate fall since the start of last month to around 27 basis points. The market's prior gains were supported by vigorous foreign investor interest, spurred by the prospect of being included in a global debt index and easing crude oil prices. Foreign investors net bought bonds worth over ₹66 billion ($693 million) in the first four days of the week, with traders remaining on the bid side on Friday as well.
Foreign investment in Indian government bonds has reached unprecedented levels, with overseas holdings of index-eligible debt rising by ₹39,700 crore ($4.2 billion) so far in June, putting it on course for the biggest-ever monthly purchase. As reported by The Economic Times, foreign investors bought a record ₹29,900 crore ($3.16 billion) of FAR bonds after New Delhi and the central bank unveiled measures in June to attract foreign capital and support the rupee. The surge in foreign buying coincides with Goldman's recommendation, as overseas holdings have risen after India scrapped taxes on debt for foreigners and expanded the pool of securities eligible for index inclusion. Foreign portfolio investors (FPI) have poured in a record high of ₹55,518 crores in June in Indian government bonds, with part of the inflows driven by expectations that an announcement on the country's inclusion in the Bloomberg bond index is imminent. Goldman Sachs expects $15 billion passive inflows in the phase-in period after the announcement, with the report noting that inclusion is "a question of timing rather than direction, and a mid-year announcement likely." Analysts at Goldman Sachs see foreign flows to Indian government bonds rising by $10 billion in 2026, according to a Wednesday note, further strengthening the investment outlook.
Oil prices experienced significant stabilization as diplomatic resolution emerged from the latest US-Iran tensions. Brent crude has fallen more than 21% this month after an interim U.S.-Iran peace deal halted hostilities and reopened the Strait of Hormuz. According to The Economic Times, at about $72.50 a barrel, prices are back near pre-war levels and well below the late-April peak of $120. India, as the world's third-largest oil importer, is highly vulnerable to oil swings, but the recent decline has transformed market dynamics. Oil prices eased on the day, providing further relief to investors, as India imports almost 90% of its crude requirements. HSBC now forecasts a $25 billion balance of payment surplus for the current financial year ending March 2027, after two years of deficit, citing the all-in FX package to attract inflows and the fall in oil prices. RBI Governor Sanjay Malhotra said India is unlikely to raise its inflation target and that there may be a case for lowering it over the long term, adding to the positive market sentiment.
Liquidity conditions have improved significantly, swinging to a surplus of ₹1.12 lakh crore on Tuesday after staying in deficit for a week. According to The Economic Times, India's overnight index swap rates largely consolidated this week, after nosediving for most of June. The one-year swap rate eased slightly to 5.7775%, while the two-year swap rate fell 1.75 bps to 5.91%. The five-year rate settled 2 bps lower at 6.18%. The 10-year bond yield dropped 6 basis points in the week, bringing the aggregate fall since the start of last month to around 27 bps. New Delhi is set to sell ₹340 billion of the 10-year note on Friday, with traders noting that "underlying demand is strong, but traders could look to book profits before the large supply of the 10-year note." Central Bank Governor Sanjay Malhotra said at an event in Russia on Wednesday that India is unlikely to raise its official inflation target and that there may be a case for lowering it over the long term, adding to the positive market sentiment.
Indian government bonds gained sharply on Thursday, with the benchmark 6.94% 2036 bond yield ending at 6.7180%, down from 6.7563% on Wednesday. According to The Economic Times, market participants expect Bloomberg Index Services to announce its decision this month, with the index committee expected to meet mid-July to review the inclusion decision. Foreign investors have accumulated bonds worth around ₹368 billion in the last six weeks, with data for Friday yet to be added. Foreign investors have net bought ₹324 billion ($3.40 billion) of bonds since June, driven by tax relief measures, a steadier rupee and hopes of India's inclusion in Bloomberg's Global Aggregate Index. Foreign investors now hold ₹105 billion of the benchmark 10-year note, meaning it accounts for 15.4% of their total holdings, showing strong appetite for the five most liquid papers. An approval is a very likely outcome this time, according to a senior executive at a foreign bank, noting that an approval is a very likely outcome this time. The Bloomberg Global Aggregate Index tracks over $70 trillion worth of bonds, making it a benchmark for many of the world's largest asset managers.
The corporate bond market is witnessing significant expansion with ICICI Bank planning its first benchmark US dollar bond sale since 2017, aiming to raise at least $500 million through offshore bonds. According to The Economic Times, the proposed issuance comes after the RBI introduced a concessional foreign exchange swap facility, encouraging Indian lenders to tap overseas markets for funding. After a raft of measures to support the local currency and attract foreign inflows from Indian policy makers last month, overseas investors have turned bullish as they anticipate these notes will be included in the Bloomberg Global Aggregate Bond Index in its next review. Foreign investors have shown strong appetite for the five most liquid papers, especially the benchmark 10-year bond, with the market's prior gains supported by unwavering foreign purchases on bets that Indian government bonds will be included in a global debt index.
