Indian bond yields ease almost 8-10 bps in one month on positive cues

Bonds

Indian bond yields in the last one month have eased around 8-10 basis points (bps) due to international and domestic cues.

This is because of strong demand from foreign portfolio investors, easing US treasury yields and demand from banks for government securities post draft norms by the Reserve Bank of India (RBI) on Liquidity Coverage Ratio (LCR), money market experts said.

"Bond yields have taken a positive cues from various factors and one such factor is higher demand from foreign investors and banks post draft LCR norms," said Mataprasad Pandey, Vice President, Arete Capital Service.

According to the CCIL data, the 10-year benchmark bond 7.10 percent 2034 yield stood at 6.933 percent on July 30, as compared to 7.012 percent on July 2.

With this fall, the spread between the 10-year benchmark bond and repo rate have narrowed to just 43 bps on July 30, from 51 bps on July 2. Currently, RBI's repo rate stands at 6.50 percent.

Jyoti Prakash Gadia, managing director at Resurgent India said lower projected borrowing of government is also helping the bond yields to ease.

In the last few months, especially after the announcement of Indian bonds inclusion in the JP Morgan's global bond index, demand from foreign investors has increased sharply.

This was reflected in the holding of FPIs under Fully Accessible Route (FAR) securities, which increased sharply since the announcement of inclusion on September 22, 2023.

While, in this month, holdings of FPIs under FAR securities have increased by Rs 14,916.367 crore. As on July 30, holdings of FPIs in FAR securities stood at Rs 203,444.307 crore, as per CCIL data.

During this one month period, holdings of FPI in the 10-year benchmark bond has surged to 8.49 percent as on July 30, as compared to 4.32 percent on July 2.

Further, demand from bonds has also increased from the Indian banks after the RBI released the draft norms on the LCR, which requires banks to maintain a stock of high-quality liquid assets (HQLA) to cover the expected net cash outflows over the next 30 days.

The draft circular applies to all commercial banks, excluding payment banks, regional rural banks, and local area banks, and is proposed to take effect from April 1, 2025.

However, money market experts said that the decision of the RBI in consultation with the government is unlikely to have major impact on the inflows because 14-year issuances are very limited and 30-year securities are not suitable for foreign investors.

"The change in Fully Accessible Route ( FAR) rules by excluding 14 year and 30 years government securities is likely to have only a limited negative impact as the 14-year bonds are in any case not issued in large quantum," Gadia said.

Further Gadai added that the 30-year bonds, being a long-term investment, is primarily held by Indian institutions to support long term projects and FPI are likely to have limited interest in them.