The addition of Indian bonds to global indexes could fuel only short-term gains in rupee and bonds, with focus shifting to other factors after the announcement, DBS said. "Beyond that buoyancy, the prospect that bulk of the benefits will accrue in FY24, and (with) some part of the flows already front-running the news, further currency strength is likely to be kept in check," senior economist Radhika Rao said in a note. Bond yields have fallen over the past few sessions, amid a buying spree led by bets that the inclusion announcement may happen as early as next month. India's benchmark 10-year bond yield was down four basis points in September, after easing 13 bps in the previous month, as talks of index inclusion gathered pace.
Indian rupee was trading largely unchanged for September, after depreciating for eight consecutive months through August. In the past, the Reserve Bank of India has mopped up dollars to add to their foreign reserves, DBS said. "With the RBI’s strong presence in the spot and forward space in the past eight-nine months already resulting in $88-$90 bn fall in reserves, fresh inflows will provide a timely opportunity to rebuild defences," DBS' Rao added.
The RBI's foreign exchange reserves declined to $553.1 billion in the week ended Sept. 2, their lowest since October 2020 and down by $8 billion from the previous week.
Meanwhile, elevated supply of bonds in the second half of this financial year will bring focus back to incremental demand, resulting in a gradual rise of yields, the house said.
India aims to raise 14.31 trillion rupees on a gross basis through sale of bonds this year, of which 5.86 trillion rupees of supply is slated to hit the market in October-March.
