Bond market optimistic on inclusion in international bond indices

The domestic government bond market has remained resilient amid global uncertainty because of optimism regarding the inclusion of bonds in international indices, dealers said.

The yield on the benchmark 10-year government bond rose by 4 basis points to settle at 7.21 per cent on Monday. Traders believe the yield should remain below the psychologically crucial 7.25 per cent mark, given the robust demand at the current yield level.

The yield on the benchmark 10-year bond remained flat in August and moved in a narrow range throughout the month.

"We are witnessing the overnight index swap (OIS) tracking US yields and crude, but people are going long (buying) on bonds," a dealer at a private bank said.

The momentum surrounding the potential inclusion of Indian government bonds in global indices gained traction following the release of a Reserve Bank of India (RBI) inter-departmental group report in August. The report said the benefits derived from incorporating government bonds into global indices outweigh the associated risks.

In 2022, prominent index providers, including JP Morgan and FTSE Russel, maintained their interest in Indian government bonds by retaining them on their watch lists. A review is due by the end of the month.

The positive sentiment among traders is also because of the view that the RBI might keep the repo rate unchanged in spite of rising inflation and could stick to other measures like the incremental cash reserve ratio to suck out excess liquidity from the system, dealers said.

"The US market has been very uncertain. The market is divided on whether the US Federal Reserve will hike rates or not. But our market is quite certain in that manner; the only uncertainty is the monsoon," a dealer at a state-owned bank said. "Our market should slowly decouple from the US market," he said.