Why a depleting forex chest is good news for the Indian bond market

The central bank sold $5.7 billion of foreign exchange in the week ended Oct. 12, up from $752 million in the previous week

The Reserve Bank of India’s efforts to defend the rupee in recent weeks spells good news for the bond market. The intervention comes when the banking system is reeling from a cash crunch, and could lead to more debt purchases by the authority to replenish liquidity.

Analysts at Nomura Holdings Inc. and Bank of America Merrill Lynch say the outflows from the banking system because of a festive season and the RBI’s currency intervention is adding to a liquidity deficit, which was near the widest in two years on Wednesday.

“We reiterate our standing call that the RBI will issue an OMO