Benchmark bond yield at three-year low; rupee under 86 against US dollar

The yield on India’s 10-year benchmark bond has fallen to its lowest level in three years, buoyed by strong foreign inflows amid expectations of further monetary policy easing.

 

The rupee, too, strengthened to a 10-week high versus the dollar on Friday and closed under the 86 mark, logging its best weekly performance in two years and emerging as Asia’s strongest currency, so far this month. 

 

The 10-year government bond yield dropped by 8 basis points over the week — its sharpest weekly decline in four months since November 30, 2024 — to settle at 6.62 per cent, down 1 basis point from the previous close. 

 

Foreign investors continued to pour money into government securities under the Fully Accessible Route (FAR), with net inflows reaching ₹8,560 crore this week. On Friday alone, foreign investors purchased ₹644 crore worth of FAR securities.

 

March has seen the highest net foreign inflows into the domestic debt market since August 2024, with foreign investors snapping up ₹8,497 crore worth of domestic securities as of Wednesday. 

 

Market participants believe a 25-basis-point repo rate cut in April has already been factored in due to softer inflation data. However, they now anticipate an additional 25-basis-point cut in June, which could spur further demand from investors. 

 

“We’ve been seeing steady inflows that are expected to continue. By the end of this financial year, yields should hover around current levels, perhaps dipping by another 2 basis points to about 6.60 per cent,” said a dealer at a state-owned bank. 

 

Total foreign portfolio investment in Indian government securities designated under FAR has reached ₹2.96 trillion as of Friday, nearing the ₹3 trillion mark, according to Clearing Corporation of India (CCIL) data.  

 

The rupee, meanwhile, strengthened against the US dollar on Friday, buoyed by robust dollar inflows and unwinding of speculative long-dollar positions, dealers said. 

 

“The Indian rupee has broken past the 86-per-dollar mark for the first time since January, supported by a surge in foreign investment into both capital and debt markets,” said Dilip Parmar, senior research analyst at HDFC Securities. The rupee’s gains were also backed by stronger-than-expected trade data and a rise in foreign exchange reserves following the Reserve Bank of India’s (RBI) USD/INR swap intervention, he noted. 

 

The domestic currency appreciated 1.19 per cent over the week — its steepest weekly gain in more than two years since January 2023 — settling at 85.98 per dollar on Friday, up from its previous close of 86.37. It breached the psychologically significant 86-per-dollar level for the first time in nearly three months since January 10. 

 

Dealers said the RBI intervened to absorb some of the strong dollar inflows, which limited further gains while bolstering foreign exchange reserves. India’s forex reserves stood at $654.3 billion as of March 14 — enough to cover more than 11 months of imports and 91 per cent of external debt outstanding as of the end of September 2024. 

 

“The US Federal Reserve has indicated that inflation driven by tariffs is likely to be temporary, and it has maintained its interest rate outlook, which is a positive development for the rupee,” said the treasury head of a private bank. “The RBI is intervening on both sides. I don’t see the rupee moving below 85.90 per dollar, as the central bank will likely absorb the excess flows,” he added.  

 

The rupee has gained 1.8 per cent against the dollar this month, making it the best-performing currency in Asia so far, followed by the Malaysian ringgit. The monthly rise is the strongest since August 2021.