Indian government bonds delivered their best performance in over a week on Friday, with the 6.94% 2036 bond yield falling 3.8 basis points to 6.7139%, marking the largest single-day drop since July 2. According to The Economic Times, the benchmark yield ended little changed week-on-week, demonstrating sustained momentum despite the strong intraday movement. Bond yields move inversely to prices, meaning the yield decline reflects significant buying interest and positive sentiment across the market. The improvement was fueled by robust demand during a weekly auction and additional foreign investments, with falling oil prices further enhancing market sentiment.
The ₹320 billion ($3.36 billion) state debt sale showed strong demand, with traders noting that cutoffs demonstrated investors were willing to add duration risk, especially with foreign demand intact. As reported by The Economic Times, this strong auction performance came at a crucial time when the market was consolidating after three consecutive sessions of gains. The auction included liquid five-year debt and a longer-duration 40-year bond, with the sale timing coinciding with the consolidation phase. Traders said the cutoffs showed investors were willing to add duration risk, especially with foreign demand intact, according to The Economic Times. A Bloomberg inclusion announcement could decide whether the rally extends, as noted by market participants.
Indian government bond yields extended their slide, with the benchmark 10-year yield settling at 6.69%, down from its previous close of 6.7108%. According to The Economic Times, the close below the 200-day moving average represents a key technical break and could attract momentum buying. A private bank trader noted that this is the first close below the 200-day moving average since October 2025, signaling potential for further gains. The 10-year bond yield eased almost 3 basis points on Monday and has declined by an aggregate of 37 basis points over the past six weeks. The benchmark yield is expected to trade between 6.65% and 6.70% in early Tuesday deals, as reported by The Hindu BusinessLine. However, any upside in yield is likely to be capped around 6.70%, where buying interest should re-emerge, according to a private bank trader.
Brent crude came off highs to trade at about $76 per barrel but still ended the week 6% higher, providing significant relief to India as the world's third-largest oil importer and consumer. As reported by The Economic Times, lower oil prices benefit India by easing pressure on inflation, the current account and the rupee. The oil price decline is a direct positive for Indian markets, with foreign investors continuing their strong bond purchases, reaching nearly $4 billion since early June after recent policy measures boosted expectations of India's inclusion in Bloomberg's Global Aggregate Index. Bank of Baroda said risks to core inflation could intensify as companies pass on higher input costs to consumers against stable demand, with food prices also rising as El Nino conditions build, worsening the outlook for monsoon showers. Falling oil prices further enhanced market sentiment, though traders are keeping a vigilant eye on potential geopolitical tensions and weather disruptions.
Overseas inflows under the Fully Accessible Route have remained strong, with overseas investors buying more than ₹351 billion ($3.70 billion) in the last month since the central bank's monetary policy decision. According to The Economic Times, Indian bonds have drawn 351 billion rupees ($3.70 billion) in net foreign inflows since June 5, supported by tax breaks, the addition of longer-tenor notes under the Fully Accessible Route and expectations of inclusion in the Bloomberg Global Aggregate Index. A decision is expected later this month, adding another potential catalyst for sustained foreign buying. Overseas investors have bought nearly $4 billion of Indian bonds since early June, after policy measures to support inflows have raised expectations of India's inclusion in Bloomberg's Global Aggregate Index. The one-year OIS fell 3 bps to 5.78%, the two-year dropped 3 bps to 5.93%, and the five-year eased 2 bps to 6.19%, as reported by The Economic Times.
Monsoon concerns have eased significantly, with the cumulative rainfall deficit narrowing to 24% below the long-period average as of July 5, compared with a 43.1% deficit as of June 28, according to Barclays. However, rainfall still remains below normal for the season so far, as noted by Barclays. While improved rainfall has eased immediate concerns, food inflation risks remain due to the El Nino weather phenomenon, according to Bank of Baroda. This development is easing concerns over food inflation, which could support broader economic conditions. India's overnight index swaps fell, led by receiving interest from foreign banks, with the one-year swap rate ending at 5.73%, while the two-year rate closed at 5.87%, both marginally down. The five-year rate pared 1.75 bps to 6.1175%, as reported by The Economic Times. India's June inflation print is due on Monday, which will provide crucial insights into the current inflation trajectory.
