India bond yields drop on FTSE Russell index inclusion, RBI stance shift

Indian government bond yields declined on Wednesday, as market participants welcomed a change in the Reserve Bank of India's policy stance and the inclusion of the bonds in another global index.

The benchmark 10-year bond yield ended at 6.7676 per cent, compared with its previous close of 6.8077 per cent.
 

Global index provider FTSE Russell said it will include India's sovereign bonds in the Emerging Markets Government Bond Index from September 2025, potentially drawing billions of dollars into bonds.
 

Demand for government bonds will pick up in the medium term, keeping yields in check, analysts and traders said.

FTSE Russell is the third index provider to include Indian government bonds, after JPMorgan and Bloomberg Index Services.

"We expect $4 billion-$5 billion due to the inclusion," said Anurag Mittal, head of fixed income at UTI Mutual Fund.

It may not materially change yields in the near-term, but it opens the door for inclusion in other indexes which should lead to greater foreign participation and decline in yields, he said.
 

DOVISH RBI
 

The RBI kept its key interest rate unchanged as widely expected but changed its policy stance to "neutral," which could lead to rate cuts as early as December.
 

RBI Governor Shaktikanta Das said there was greater confidence now on the last mile of disinflation towards the central bank's 4 per cent target.
 

"It is with a lot of effort that the inflation horse has been brought to the stable - that is, closer to the target," Das said.

The 10-year yield fell to as low as 6.7392 per cent following the central bank's policy decision.

HSBC, Capital Economics, Bank of America and Barclays expect the central bank to cut rate in December, with Barclays adding one more rate cut to its forecast.
 

"As December MPC approaches, the growth slowdown in India will become apparent, as inflation aligns itself to the 4 per cent target. We expect repo rate cuts of 100 bps by December 2025, beginning December 2024," said Rahul Bajoria, India and ASEAN economist at Bank Of America.

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