Indian Bonds Rally on Oil Drop, Foreign Inflows

Indian government bonds saw a significant upswing on Friday, with the benchmark yield experiencing its sharpest decline in over a week. This positive momentum was attributed to a confluence of factors, including easing oil prices, consistent foreign investment, and strong investor appetite demonstrated at a recent weekly auction.

The 6.94% 2036 bond yield dropped by 3.8 basis points to 6.7139%. Demand was notably high during a ₹32 crore sale, even for a 40-year note, indicating investor willingness to embrace longer-term risks, especially with sustained foreign interest.

Overseas investors have infused nearly $4 billion into Indian debt since early June. This inflow is largely driven by policy initiatives aimed at supporting foreign investment and heightened expectations of India's inclusion in Bloomberg's Global Aggregate Index, with a decision anticipated later this month.

Despite Brent crude trading around $76 per barrel, its weekly gain of 6% continues to pose inflation and rupee depreciation risks for India. Traders remain watchful of geopolitical tensions and monsoon-related risks, with a potential Bloomberg index inclusion announcement eyed as a catalyst for further rallies.

Overnight index swap rates also declined, influenced by foreign demand and stabilizing oil prices. The one-year and two-year OIS rates fell by 4.25 basis points each, while the five-year swap eased by 3.5 basis points.