India's 10-year government bond yield fell 4.5 basis points to 6.9082%, marking its lowest level since April 21 and achieving its highest closing point in seven weeks. According to The Economic Times, this represents the fourth consecutive session of decline, building on Friday's momentum from the central bank's measures aimed at boosting foreign inflows. Brent crude futures were down 1.93% at $92.41 a barrel in Asian trade, providing additional support to bond markets as India imports about 90% of its oil, leaving its economy highly exposed to the war and effective blockade of the Strait of Hormuz. The benchmark 6.48% 2035 bond yield fell 4.5 basis points to 6.9082%, extending its decline into a fourth straight session as oil prices eased after Iran and Israel said they had halted attacks following an appeal from U.S. President Donald Trump.
The RBI unveiled a series of measures aimed at strengthening foreign capital inflows, including scrapping capital gains tax for foreign investors in government bonds and removing the 20% tax on interest earned from such investments with effect from April 1, 2026. The central bank also offered concessional forex swaps until September 30 and subsidised hedging costs for overseas borrowing and foreign currency non-resident deposits. Additionally, the RBI expanded the Fully Accessible Route (FAR) by including new issuances of 15-year, 30-year and 40-year government securities, with all new bonds now part of the fully accessible route that allows unfettered foreign access. According to The Economic Times, foreign investors have bought a net $800 million of Indian government bonds over the past two days, demonstrating sustained institutional interest in Indian debt markets. Analysts have pegged inflows of around $50 billion from these measures, which could nearly negate the pressure on the balance of payment for this financial year.
Foreign investors are strategically pivoting toward short-term Indian government bonds as they identify attractive entry points amid expectations of the interest rate cycle turning. According to Reuters, bonds with maturities of less than five years made up over two-thirds of the top 10 notes foreign investors purchased during March-May, significantly higher than less than half of similar purchases in January-February. This shift reflects a clear preference for shorter duration instruments as market conditions evolve, with the Iran war driving inflation higher creating additional pressure for monetary policy tightening. As reported by Alok Singh, head of treasury at CSB Bank, the Reserve Bank of India's measures are creating some confidence, but rising U.S. yields and money going into U.S. equities along with the persistent war risks are still overwhelming for the market. The latest data from clearing house sources confirms this trend, with overseas investors increasingly favouring short-term Indian government bonds, attracted by more favourable entry points amid expectations that the interest rate cycle could turn.
The Reserve Bank of India expects inflation to average 5.1% in the year to March 2027, up from 3.48% in April, while growth is seen slowing to 6.6% from 7.7% last year. According to The Economic Times, the government has set a fiscal deficit target of 4.3% of GDP for this financial year, but a Reuters poll sees it widening to 4.7%. India's overnight index swap rates eased as lower oil boosted sentiment, with the one-year swap ending at 5.99%, down 5.5 bps, while the two-year rate dropped 8.25 bps to 6.17%. The five-year rate fell 11 bps to 6.43%, reflecting improved market confidence amid the central bank's supportive measures and easing oil price pressures.
According to a comprehensive report by DSP Mutual Fund, India has received $95.5 billion in FPI debt inflows in about 28 years, compared with $154.4 billion in equity inflows, marking the growing importance of the country's debt market in attracting foreign capital. Since FY25, India has received around $19.3 billion in FPI debt inflows, of which $11.8 billion came through the FAR route. The report noted that debt inflows have gained momentum following India's inclusion in global bond indices and the introduction of the FAR for government securities. DSP Mutual Fund highlighted that India is well-positioned to attract further debt inflows, with real government security yields currently above 2% and the country's broad real effective exchange rate (REER) below 90. The report emphasized that foreign investors have historically preferred markets offering positive real yields, stable currency expectations and easier market access, with the removal of capital gains tax expected to improve access further by making FAR a quasi-open, tax-efficient window for global investors. India posted an unexpected current account and balance of payments surplus in the January-March quarter, helped by strong services exports, higher remittances and RBI forex swaps. Punjab National Bank expects the banking sector to raise $35 billion to $40 billion via foreign currency deposits under this scheme, according to a top executive told Reuters. Government and RBI measures could bring in $70-$75 billion in inflows by the end of the second quarter of fiscal 2027, Emkay Global Financial Services wrote in a note, while HSBC said it now expects RBI measures to improve India's external balance by about $30 billion in FY27, compared with its earlier forecast of a deficit widening to about $65 billion.
