India benchmark bond yield falls to 6.9646% as dollar inflows hit record $136.38 billion
Record inflows into India's dollar schemes boosted liquidity but cooled bond yields as oil prices rose, causing the government bond market to reverse recent gains.
Indian government bonds settled at 6.9646% on Thursday after giving up early progress driven by massive foreign capital inflows. The benchmark 2036 bond yield dropped slightly from Wednesday's level after briefly hitting a low of 6.9323%. Shorter maturity instruments performed better, with the five-year yield down 4 basis points to 6.5216%. Traders covered short positions earlier in the session following unexpected inflows totaling $136.38 billion from India's central bank dollar-attracting schemes between June 5 and August 31. These funds pushed the banking system liquidity surplus to a record 9.7 trillion rupees and lifted the currency 0.5% to 94.4850 per dollar. A spike in oil prices offset much of the benefit from the capital influx. While analysts noted the inflows strengthen the central bank's capacity to support the currency, focus has shifted to potential liquidity adjustments. The Reserve Bank of India has conducted 28 variable-rate reverse repo operations since August 5 to drain cash, but traders anticipate further stringent measures including possible cash reserve ratio hikes and bond sales.
