Government bonds and the rupee both gained significantly on Tuesday as heavy foreign investment in domestic assets was sparked by the excitement around the possibility of including Indian sovereign debt in a global bond index, according to dealers.
Bond prices increased despite rising consumer price index inflation in India. The local currency saw its biggest one-day rise since July 27 thanks to a strong dip in the dollar index in expectation of lowering US inflation.
The benchmark 10-year bond’s yield finished at 7.08 %, down from 7.14 % at the previous closing. The movement of bond prices and yields is the opposite. A 1 basis point decrease in the yield on the 10-year paper results in a price increase of about 7 paise. As opposed to 79.53 per dollar at the previous closing, the rupee finished at 79.15 per dollar. The local currency has lost 6.07 % of its value versus the US dollar so far in 2022.
Since about mid-August, there has been significant speculation that Indian sovereign debt will be included in a global bond index since Goldman Sachs and other major international financial institutions have been supportive of the idea.
The anticipated $30 billion in annual flows that would result from inclusion in a global bond index would greatly improve the demand-supply dynamics for bonds and aid the government in financing its budget deficit. Dealers predicted that an announcement will be made soon if the procedure is to be operating by the middle of 2023.
A senior bond dealer stated, “The announcement is likely around September 15—25, which is why there is some front-running by some FPIs (foreign portfolio investors).” “FPI inflow into bonds today was close to Rs1,000 crore. Everyone wants to participate in such a long-lasting rally while the momentum is strong. Because of this, the inflation statistics had no adverse reaction, he claimed.
Data released on Monday after market hours revealed that CPI inflation accelerated to 7% in August from 6.71% in July, continuing beyond the central bank’s maximum tolerance limit for the first eight months of 2022. The RBI’s objective for inflation is 4%, with a 2% margin of error on each side. The RBI is anticipated to increase the benchmark policy rate by 35 to 50 basis points at its meeting later this month after raising the repo rate by a total of 140 bps since May.
Due to the RBI’s staunch support of the domestic currency, the rupee has outperformed most of its counterparts in developing markets and benefited from the weakening dollar. Due partly to recent drops in gasoline prices, the US consumer price index increased by 0.1% to 8.3% in August. In the near future, Parmar expects the rupee will trade in a range of 78.61 and 79.70 per dollar.
For feedback and suggestions, write to us at editorial@iifl.com
IIFL Customer Care Number 
IIFL Securities Support WhatsApp Number
