India bonds sink on RBI's early close of FX swap facility

Synopsis

The Indian government bond market experienced a dip in demand on Monday, leading to higher yields. In an unexpected move, the central bank accelerated the deadline for its diaspora deposit swap program. This decision came after robust foreign deposit inflows from banks. As policymakers weighed domestic liquidity impacts and borrowing costs, the early deadline disappointed investors, shifting their outlook on upcoming surpluses.

Demand for Indian ​government bonds weakened on Monday, ​pushing the benchmark 10-year yield up by the most ​in over a month, after the central bank unexpectedly brought forward the deadline for its discounted swap window for diaspora deposits.

The yield on the benchmark 6.94% 2036 ‌bond surged 5 ⁠basis points ⁠to 6.8071%, its biggest single-day jump since July 14. Bond yields move inversely ​to prices. It settled above the key 6.80% level as stop-losses were triggered, which traders ​said could pave the way for further increases in yields in the next few sessions.

Strong inflows from its foreign deposit drive prompted the Indian central bank to cut short a ⁠zero-cost FX ‌swap facility for banks, with policymakers also wary of the domestic liquidity effects and the cost of such fundraising, ⁠analysts said.

The Reserve Bank of India on Friday advanced the swap facility's closing date by a month after banks raised more than $50 billion from non-resident Indians in about two months.

The facility was part of a wider package unveiled in June to bolster India's balance of payments. Its early closure disappointed markets, traders said.

"FY27 BOP surplus could settle around $40 billion, versus $50 billion ‌expected earlier," said Gaura Sen Gupta, chief economist at IDFC First Bank.

India's banking-system liquidity surplus swelled to a four-month ​high of ​3.99 trillion rupees ($41.74 ⁠billion) on Friday, prompting expectations of further RBI liquidity-draining operations.

Selling was heaviest in shorter bonds, with the five-year yield rising 8 basis points.

Brent crude also ​edged higher in Asian trade, nearing $90 a barrel.

RATES Overnight index swap rates rose sharply, amplifying bond selling, traders said.

The one-year swap rose 5.75 bps to 5.7875%, the two-year gained 7.5 bps to 5.9975% and the five-year jumped 9.25 bps to 6.34%.

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