India bonds log third weekly drop on global index setback

MUMBAI: Indian government bonds fell for a third straight week after Bloomberg Index Services deferred India’s inclusion in its flagship bond index, triggering an unwinding of trades built on that expectation.

The benchmark 10-year yield settled at 6.6767% on Friday, its highest close in 10 months, up nearly 4 basis points for the week. It last ended at 6.6498% on Wednesday, with markets shut on Thursday for a local holiday.

Bond yields move inversely to prices. Earlier this week, Bloomberg Index Services deferred adding Indian bonds to its Global Aggregate Index and said that the review for inclusion was open and ongoing. The index provider said it will issue another update by mid-2026.

Analysts had expected $10 billion to $20 billion in inflows if inclusion progressed, prompting investors to build positions in anticipation of added demand in a market facing heavy supply and weak buying interest.

Traders remain concerned about the market’s ability to absorb record debt issuance of 8 trillion rupees in January-March, including 5 trillion rupees from states.

Market participants are now expecting more open market purchases by the Reserve Bank of India to cushion a demand-thin market.

“We foresee the RBI injecting more rupee liquidity through OMO purchases and USD/INR FX buy/sell swaps through 2026,” MUFG said in a note.

The central bank has bought 2.54 trillion rupees ($27.99 billion) of bonds since December and is set to purchase another 500 billion rupees next Thursday.

RATES

India’s overnight index swap rates surged this week due to heavy paying after the index inclusion snub.

The one-year OIS rose 4 bps this week to 5.5325%. The two-year swap rate was up 4 bps this week at 5.6275% and the five-year OIS rate ended Friday at 6.0250%, up nearly 7 bps for the week.