Global bond index snub raises odds of RBI adding to record India debt buying, investors say

MUMBAI: The delay in including Indian bonds in a key global index has raised the chances of the central bank extending its record government debt buying, seeking to cushion the market from weaker foreign inflows and rising yields, according to investors.

On Tuesday, Bloomberg Index Services deferred the inclusion of local bonds to its flagship Global Aggregate Index, disappointing some market participants who were counting on foreign inflows amid worries over excess supply and elevated yields.

Analysts had expected phased inflows of about $10 billion to $20 billion had the inclusion progressed.

The unexpected deferral raises the probability of one more round of liquidity injection by the Reserve Bank of India in the current quarter, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

He added that the RBI should continue conducting secondary market bond purchases to alleviate supply pressures. The 10-year Indian benchmark bond yield has risen nearly 10 basis points since the index deferral announcement, compounding concerns in a market that is already burdened by worries over heavy state debt issuance.

The RBI has bought 2.54 trillion rupees ($27.99 billion) of bonds since December through open market and secondary market purchases, and is set to purchase another 500 billion rupees next Thursday.

Most market participants expected Thursday’s purchases to be the last for the current financial year, ending in April, before the index deferral was announced.

Bond purchases in December and January are slated to exceed the 2.76 trillion rupees bought by the central bank between April and November.

“The RBI may need to conduct more OMO purchases of around 1.5-2 trillion rupees in February-March, and will have to give out clear yield signals by including liquid papers,” said VRC Reddy, treasury head at Karur Vysya Bank.

The central bank has been buying relatively illiquid bonds through open market operations this month, while market participants have sought the inclusion of the former benchmark 6.33% 2035 paper.