Government bond yields declined sharply on Wednesday as market participants drew comfort from Reserve Bank of India Governor Sanjay Malhotra's comments that it was premature to discuss interest rate hikes. The new 10-year benchmark G-Sec yield softened 5 basis points to close at 6.78 per cent, down from the previous close of 6.83 per cent, with the price rising 35 paise. As reported by The Hindu BusinessLine, Malhotra said "If it was so certain that we are going to hike in the coming months, then we would have changed the stance from neutral to restrictive, right? We did not do that precisely because there is elevated uncertainty." The governor noted that uncertainty stemming from geopolitical developments remained elevated, while risks from crude oil prices had moderated following recent developments in West Asia.
Reserve Bank of India Governor Sanjay Malhotra confirmed that most steps required for India's inclusion in global bond indices have been completed, with investor-friendly measures either implemented or rolling out in coming weeks. Speaking to television channel ET NOW, Malhotra said "Whatever was to be done has been already done. Some ease-of-investing measures are in the pipeline and most of them have either been completed or will be done in a few days to a few weeks." India remains hopeful of securing inclusion in Bloomberg's Aggregate Bond Index after domestic sovereign bonds were included in JPMorgan's emerging market debt index in 2024. The central bank's dovish stance continues to support bond markets, with Malhotra noting that "We see no need to anticipate a rate hike at this stage. The RBI will watch incoming data, but if the monsoon remains broadly supportive, even with a deficit of up to 10%, any inflation impact should be temporary and rate hikes are unlikely."
Brent crude oil prices provided additional support to bond markets, with prices declining to $75 per barrel as the arterial shipping route – the Strait of Hormuz – is gradually opening up after the US and Iran signed an interim agreement to end the West Asia conflict. As reported by The Hindu BusinessLine, Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLP, observed that the rally in the new benchmark 10-year G-Sec has been driven by a combination of improving foreign investor sentiment, softer crude oil prices and the RBI's reassuring policy communication. The sharp correction in Brent crude prices to around $75 per barrel has also improved the outlook for India's inflation trajectory, current account deficit and currency. Washington has waived sanctions on Tehran for 60 days and Tehran has allowed shipping to resume through the Strait of Hormuz, supporting expectations of foreign inflows into Indian government bonds.
Overnight index swap rates fell significantly following the RBI's dovish stance, with the five-year OIS rate settling at 6.18 per cent, against the previous close of 6.26 per cent. Market participants said receiving interest from offshore investors in the overnight indexed swap (OIS) market further contributed to the rally. A dealer at a primary dealership noted that "People are bullish after crude oil prices declined and the RBI Governor said it is premature to go for a rate hike. Receiving interest from offshore investors has also supported bond prices. The five-year OIS rate has eased to around 6.15 per cent." The one-year OIS rate fell more than 10 basis points earlier in the session, and is down nearly 30 basis points since the latest policy decision. A tightness in banking-system liquidity, which is currently at near-neutral levels, is expected to improve with rising inflows. The one-year rate is now pricing in only two rate hikes this year, according to a foreign-bank trader.
Foreign investors have demonstrated strong confidence in Indian government bonds, with foreign investors buying ₹230 billion ($2.43 billion) of government bonds so far in June, putting them on course for their highest monthly purchase in nearly two years. According to DBS Group Research, "Sentiment has been supported in part by expectations that Indian government bonds could be considered for inclusion in Bloomberg's global bond indices." This potential inclusion could drive further gains in rupee bonds and currency, spurred by increased non-resident deposit and offshore borrowings. Foreign portfolio investors (FPIs) have bought nearly ₹224 billion worth of bonds in June so far, demonstrating continued institutional interest in the market. The inclusion would complement the Reserve Bank of India's recent efforts to attract foreign inflows and bolster the rupee. Dealers noted that some market participants were also positioning for the possibility of additional inflows related to bond index inclusion, adding to the positive sentiment. Radhika Rao, Senior Economist & Executive Director, DBS Bank, said the Rupee has retained its recent gains, while foreign investors have turned constructive on INR debt, with inflows exceeding $3 billion since April 2026.
Market participants said the rally could face resistance around the 6.78-6.79 per cent level on the yield on the benchmark 10-year bond, with technical indicators suggesting a pullback if yields approach those levels. As reported by The Hindu BusinessLine, Venkatakrishnan Srinivasan noted that the outlook for G-Secs remains constructive, but the current rally is being driven more by improving sentiment and favourable external developments than by a fully settled macroeconomic backdrop. The rupee bounced back after hitting an intraday low of 94.91 per US Dollar, supported by RBI intervention and FPI-related inflows into the debt market. The Indian currency closed 7 paise higher at 94.6650 per USD against the previous close of 94.7350. The dollar index rose to 101.62 against the previous day's 101.17, on expectations of further rate hikes by the US Federal Reserve. Dealers said dollar sales by state-owned banks, likely on behalf of the RBI, helped cushion the domestic currency against further weakness. Market participants said recent RBI measures aimed at attracting foreign currency inflows, including those related to FCNR(B) deposits and external commercial borrowings, continued to support sentiment.
