Indian bonds may slip after RBI shortens swap window for diaspora deposits

Indian government bonds are set to weaken on Monday after the ​Reserve Bank of India’s surprise move to close its concessional ‌diaspora-deposit forex swap window a month early dented ​sentiment, while firmer oil prices added pressure.

The yield ⁠on the benchmark 6.94 per cent 2036 bond may hover in the 6.75 per cent to 6.78 per cent range, a private-bank trader said. It settled ‌at 6.7578 per cent on Friday. Bond yields move inversely to prices. The RBI said on Friday ‌it will close a discounted forex swap facility for ‌banks ⁠to hedge against diaspora foreign-currency deposits a ⁠month earlier than planned, following robust inflows of more than $52 billion.

Banks will no longer be allowed to tap the zero-cost hedging facility ​after August 31, instead ‌of the earlier deadline of September 30.

Markets will react to the early closure of the FCNR(B) scheme, while Brent crude is also higher, said Kruti ‌Chheta, Mumbai-based fund manager and fixed-income analyst at ​Mirae Asset Mutual Fund.

Brent crude rose 0.7 per cent to $89.20 a barrel in Asian trade as prospects ⁠for US-Iran peace talks remained uncertain and tanker traffic through the Strait of Hormuz stayed disrupted.

Indian bonds have ‌traded in a tight range so far in August. The bond market had drawn support from strong FCNR(B) inflows, which boosted banking-system liquidity, and from the RBI’s dovish policy tone. The benchmark 10-year yield has held within a 6.75 per cent-6.79 per cent band this month, with traders ‌unable to push yields decisively below the lower end of the ​range without fresh positive triggers. Traders await minutes of the RBI’s August monetary policy decision due ⁠on Wednesday for fresh cues.

India’s overnight index swap ⁠rates are poised to trade lower as early closure of the FCNR(B) swap facility hurts ‌sentiment.

On Friday, the one-year swap ended at 5.73 per cent, the two-year INR2YMIBROIS=CC rate settled at 5.9225 per cent, and the ​five-year INR5YMIBROIS=CC rate closed at 6.2475 per cent.