RBI’s Surprise Move Dents Indian Bond Market Sentiment, Oil Prices

Indian government bonds may weaken on Monday following a surprise move by the Reserve Bank of India to close its concessional diaspora-deposit forex swap window a month early, adding pressure to already firm oil prices.

Reserve Bank of India’s Surprise Move Dents Sentiment

The Reserve Bank of India’s decision to close the discounted forex swap facility for banks to hedge against diaspora foreign-currency deposits a month earlier than planned has dented sentiment in the bond market.

The yield on the benchmark 6.94 per cent 2036 bond may hover in the 6.75 per cent to 6.78 per cent range, a private-bank trader said.

Bond yields move inversely to prices, meaning that if the yield on the benchmark bond increases, the price of the bond will decrease.

Impact of Early Closure of FCNR(B) Scheme

The early closure of the FCNR(B) scheme will no longer allow banks to tap the zero-cost hedging facility after August 31, instead of the earlier deadline of September 30.

Market Impact and Details

• The Reserve Bank of India said on Friday it will close the discounted forex swap facility for banks to hedge against diaspora foreign-currency deposits a month earlier than planned, following robust inflows of more than $52 billion.
• Brent crude rose 0.7 per cent to $89.20 a barrel in Asian trade as prospects for US-Iran peace talks remained uncertain and tanker traffic through the Strait of Hormuz stayed disrupted.
• Indian bonds have traded in a tight range so far in August, drawing support from strong FCNR(B) inflows, which boosted banking-system liquidity, and from the RBI’s dovish policy tone.
• The benchmark 10-year yield has held within a 6.75 per cent-6.79 per cent band this month, with traders unable to push yields decisively below the lower end of the range without fresh positive triggers.

Key Takeaways

• The Reserve Bank of India’s surprise move to close its concessional diaspora-deposit forex swap window a month early has dented sentiment in the bond market.
• The yield on the benchmark 6.94 per cent 2036 bond may hover in the 6.75 per cent to 6.78 per cent range.
• The early closure of the FCNR(B) scheme will no longer allow banks to tap the zero-cost hedging facility after August 31.

FAQs

What is the FCNR(B) scheme?

The FCNR(B) scheme is a discounted forex swap facility for banks to hedge against diaspora foreign-currency deposits.

Why is the Reserve Bank of India closing the FCNR(B) scheme early?

The Reserve Bank of India is closing the FCNR(B) scheme early due to robust inflows of more than $52 billion.

What is the impact of the early closure of the FCNR(B) scheme?

The early closure of the FCNR(B) scheme will no longer allow banks to tap the zero-cost hedging facility after August 31.

Conclusion

The Reserve Bank of India’s surprise move to close its concessional diaspora-deposit forex swap window a month early has dented sentiment in the bond market, adding pressure to already firm oil prices.

Traders await minutes of the RBI’s August monetary policy decision due on Wednesday for fresh cues.

Investors are advised to monitor the situation closely and adjust their portfolios accordingly.