India bonds dip as RBI's diaspora swap move dents sentiment

Demand for Indian government bonds weakened early on ​Monday after the Reserve Bank of India unexpectedly closed its ‌concessional swap window for foreign-currency deposits ahead of ​schedule, cutting a key source of demand ⁠for bond purchases.

The yield on the benchmark 6.94 per cent 2036 bond jumped 3.5 basis points to 6.7909 per cent by 10:45 a.m. ‌IST. Bond yields move inversely to prices.

Still, traders said the 10-year yield was unlikely ‌to rise above 6.80 per cent, with value buyers protecting ‌6.7950 per cent.

The ⁠RBI on Friday advanced the deadline for banks ⁠to access its concessional forex swap facility for hedging diaspora foreign-currency deposits, after inflows surpassed $52 billion. Lenders now have until August 31 to ​use the zero-cost ‌hedging facility.

The swap facility was part of a broader package of measures announced in June to bolster India's balance of payments. The inflows have also helped ‌lift India's foreign-exchange reserves to a four-month high ​of $707 billion as of August 7. India's banking-system liquidity surplus has also tripled to 3.1 ⁠trillion rupees in August from nearly 1 trillion rupees in July.

"Most FCNR(B) inflows had gone into four- to ‌six-year bonds, which could face strong selling pressure because of the early closure of the swap window," a private-bank trader said. Brent crude also edged higher in Asian trade, nearing $90 a barrel as uncertainty over US-Iran peace talks persisted and tanker traffic through ‌the Strait of Hormuz remained disrupted. Traders now await minutes of ​the RBI's August monetary policy decision due on Wednesday for fresh cues.

India's overnight index ⁠swap rates rose sharply after the early closure of the ⁠swap window, which also amplified selling in bonds, traders said.

The one-year swap rose 5 bps ‌to 5.78 per cent, the two-year rate was up 6.25 bps at 5.9850 per cent, and the five-year rate gained 7.75 ​bps to 6.3250 per cent.