Bond yields ease on prospects of Bloomberg Index inclusion, foreign inflows expected

Government bond yields witnessed a decline, driven by optimism surrounding a proposal to include eligible domestic bonds in the Bloomberg Emerging Market Local Currency index. The move is anticipated to attract foreign inflows into India, impacting the dynamics of the country's sovereign bonds.

As of 10:00 am, 10-year benchmark bond yield stood at 7.1866 per cent, marking a decrease from its previous close at 7.2016 per cent. The proposal by Bloomberg Index Services follows closely on the heels of JPMorgan's decision a few months ago to include India in its widely tracked emerging market debt index, scheduled for June.

Radhika Rao, an economist at DBS Bank, highlighted the potential positive impact of these inclusions on the demand-supply dynamics for sovereign bonds. She stressed that tapping into a previously under-realized investor group could enhance the overall balance of payments and facilitate a balance between fiscal discipline and the imperative to boost infrastructure capabilities.

While there is an air of optimism in response to these developments, some market participants remain cautious. A primary dealer noted that, while there is potential for increased demand, a sharp and sustained fall is unlikely, as the inclusion in the Bloomberg EM index may not bring significant inflows due to the relatively small size of the overall assets under management.

Looking ahead, local bonds are expected to track their US counterparts, particularly as traders eagerly await US inflation data later in the week, seeking clarity on potential rate cuts by the Federal Reserve.

The recent fall in US yields, supported by a decline in inflation projections and easing oil prices, has contributed to a broader sense of market comfort. Additionally, the day will see nine states in India aiming to raise Rs 19,330 crore via bonds, a figure notably lower than the initially scheduled Rs 29,190 crore. This reflects ongoing dynamics and considerations in the Indian bond market.

(With Reuters inputs)