Indian Bonds Face Pressure as RBI Closes Forex Swap Facility
Demand for Indian government bonds took a hit on Monday morning following an unexpected decision by the Reserve Bank of India (RBI) to close its concessional forex swap window earlier than expected. This closure has reduced a vital source of demand for bond purchases.
By 10:45 a.m. IST, the yield on the benchmark 6.94% 2036 bond rose by 3.5 basis points, reaching 6.7909%. It’s important to note that bond yields move in the opposite direction to bond prices, indicating a drop in market confidence.
However, market traders believe the 10-year yield is unlikely to exceed 6.80%, with many buyers stepping in to support it at 6.7950%.
The RBI’s decision to change the deadline for banks to access its forex swap facility came after foreign currency deposits surged past $52 billion. Banks now have until August 31 to utilize this zero-cost hedging option.
This swap facility, introduced earlier this year to strengthen India’s balance of payments, has contributed to an increase in foreign-exchange reserves, which have reached a four-month high of $707 billion as of August 7. Additionally, the liquidity surplus in the Indian banking system has tripled to 3.1 trillion rupees in August from around 1 trillion rupees in July.
“Most of the inflows from Foreign Currency Non-Resident (FCNR) deposits went into four- to six-year bonds, which might see significant selling pressure due to the swap window’s earlier closure,” commented a trader from a private bank.
In related market news, Brent crude oil prices have also risen slightly in Asian trading, approaching $90 a barrel amid ongoing uncertainties over US-Iran peace negotiations and continued disruptions to tanker traffic in the Strait of Hormuz. Market participants are now looking forward to the release of the minutes from the RBI’s August monetary policy meeting, which is expected on Wednesday for further insights.
In the swaps market, India’s overnight index swap rates climbed following the swap window closure, which also intensified the selling pressure in bonds. The one-year swap rate increased by 5 basis points to 5.78%, the two-year rate rose by 6.25 basis points to 5.9850%, and the five-year rate jumped by 7.75 basis points to 6.3250%.
As the situation develops, investors will continue to keep a close watch on market trends and policy announcements for direction.
