India Bond Yields Fall as Cooling US Inflation Draws Foreign Buying
Indian government bond yields dropped for a second day as softer US inflation data reduced pressure on emerging-market debt and attracted strong foreign inflows.
India’s benchmark 6.94% 2036 bond yield dropped 3 basis points to 6.7436% by mid-morning on Thursday, extending a two-day decline of 5 basis points from a three-week high reached on Tuesday.
The rally was driven by an overnight retreat in US Treasury yields after American producer prices unexpectedly fell 0.3% last month, confounding expectations for no change. The softer data pushed the 10-year US Treasury yield down to 4.55% and drastically scaled back bets on Federal Reserve rate hikes. Futures markets now price almost no chance of a July increase, while the probability of a September hike plummeted to 51% from 75%.
Lower US yields typically relieve selling pressure on emerging-market debt by reducing the opportunity cost for international capital. For India, this macroeconomic dynamic was amplified by a concurrent drop in Brent crude below $85 a barrel. Falling oil prices temper local concerns about imported inflation, providing additional support for bonds even as fresh supply disruptions emerged in the Strait of Hormuz.
Traders noted the Indian benchmark yield has slipped below its 21-day moving average, a technical threshold that often paves the way for further price gains. This momentum was underpinned by robust domestic demand, with state-run lenders purchasing 156 billion rupees ($1.62 billion) of bonds over the past three sessions.
Foreign investors have also been aggressive buyers, acquiring more than $4.2 billion of Fully Accessible Route bonds since June 1. This sustained demand is primarily driven by expectations that India will secure inclusion in Bloomberg's Global Aggregate Index, a move that would force passive funds to allocate capital to Indian debt.
The shift in rate expectations rippled through India's interest rate swap market, where rates eased in line with US yields. The one-year overnight index swap fell 3.5 basis points to 5.8975%, while the two-year rate dropped 6 basis points to 6.06%. Reflecting the market's growing conviction that the Reserve Bank of India will keep rates unchanged, Nomura wrote in a note that it expects an "RBI hold."
