10-year bond yield sees biggest quarterly fall in 4 years on rate easing, foreign flows

Indian government bond yields declined for the fourth straight quarter, with the 10-year yield posting its biggest fall in more than four years, as interest rates turned globally and local debt's inclusion in a global index boosted demand.

The benchmark 10-year yield ended at 6.7495% on Monday, compared with its previous close of 6.7609%. It fell 26 basis points in July-September, the most since in January-March 2020.

Yields started declining from July due to the rising odds of an imminent start to the global rate easing cycle, especially in the United States.

The Federal Reserve delivered an outsized 50-basis-point rate cut in September and the odds of a similar move in November has spiked to 53% from 10% a month ago.

That has led to hopes of the Reserve Bank of India also easing policy from next week.

"With the Fed beginning its rate easing cycle, we expect the RBI to maintain a cautious yet accommodative stance. This could involve measured rate cuts to support economic growth while keeping inflation in check," said Manish Bhargava, CEO of Straits Investment Management.

The yields were also pressured by a jump in foreign investment after Indian government bonds were included in JPMorgan's emerging market debt index on June 28.

These investors have net bought bonds under Fully Accessible Route (FAR), a majority of which are part of the index, worth over 590 billion rupees ($7.04 billion) in this quarter.

They are likely to become more aggressive with purchases amid strong macroeconomic fundamentals and expectations that the RBI will soon cut rates.

"Structurally, it is a positive story for fixed income, plus a supportive rate environment will also help," said Ashhish Vaidya, managing director and treasurer, global financial markets at DBS Bank India.

“If the dollar starts to get into a depreciating mode because rates are coming off, then we can see more inflows in emerging markets.”