Indian government bonds rallied for a fourth consecutive day on Thursday, with benchmark yields dropping significantly as Brent crude oil prices fell to $72.24 per barrel in Asian trade, returning to levels last seen in late February. According to The Economic Times, the rally was capped ahead of New Delhi's ₹280 billion ($2.96 billion) debt sale due later in the day, with Brent crude prices falling toward $74, offering significant relief to major oil-importers such as India. The sustained bond rally reflects growing market confidence as shipping through the Strait of Hormuz resumed, providing additional support to global markets. The 10-year yield is now 10 basis points above pre-war levels, down from a peak of nearly 50 basis points, demonstrating the substantial recovery in bond sentiment.
Overseas investors have bought a net ₹236 billion ($2.51 billion) of government bonds so far in June, marking the highest monthly inflow in two years and potentially driven by index inclusion expectations. As reported by The Economic Times, foreign inflows into Asian bonds hit a three-month high of $5.61 billion in May, led by South Korea, Indonesia, Malaysia, Thailand and India. Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India), noted that as flows continue from FPIs with the increased likelihood of (Bloomberg) index inclusion, overall momentum is also expected to continue. The surge in foreign investment reflects growing confidence in India's debt markets amid supportive policy measures and the premium on 10-year Indian government bonds over U.S. Treasury yields narrowed to 235 basis points on Monday, its lowest since March 20.
Investors scaled back expectations of higher rates, leading to a sharp fall in overnight index swap rates on Wednesday, after RBI Governor Sanjay Malhotra said it was 'premature' to talk about rate hikes. According to The Economic Times, the one-year OIS rate dropped 2 basis points to 5.75% and the two-year rate was down 3 basis points at 5.88%, with the five-year rate falling 2.25 basis points to 6.155%. The 10-year yield has eased for four straight weeks, paring nearly 20 basis points, though betting markets are beginning to reflect the renewed Fed rate hike risk, with the probability of a rate hike next month jumping from 15.8% to 26.2% as Middle East tensions resurfaced. Debendra Kumar Dash, senior vice president of treasury at AU Small Finance Bank, noted that traders are still grappling with how the US-Iran deal will pan out as there are a lot of hiccups, adding that tight liquidity will keep bonds rangebound.
According to Business Standard, El Niño conditions are forecast to weaken India's monsoon rains this year to their lowest in 11 years. A private-bank trader noted that markets are closely watching how El Niño shapes the inflation-growth outlook and, in turn, the interest-rate trajectory. The next major trigger will be Bloomberg's decision on whether to include Indian bonds in the Global Aggregate Index, with an announcement expected this month, as reported by The Economic Times. India's overnight index swap (OIS) rates fell as softer oil supported sentiment, with the one-year swap rate falling 2.75 bps to 5.8775%, while the two-year rate slumped 4.75 bps to 6.02%. The inclusion in Bloomberg Global Aggregate Index is expected to add to India's recent efforts to increase foreign inflows into Indian debt and equities.
The ITAT has held that the accrued interest component embedded in sale proceeds from non-convertible debentures cannot automatically be treated as capital gains and may instead be taxed as interest income, as reported by The Economic Times. Tax experts say the decision could trigger greater scrutiny and fresh litigation, adding another layer of complexity to the bond market. This development comes as President Donald Trump signaled easing tensions with Iran over the Strait of Hormuz shipping, providing relief to global markets, with U.S. and Iranian officials making 'encouraging progress' in their first round of talks in Switzerland, mediators said, though tensions persisted over Lebanon and the Strait of Hormuz.
