Indian government bonds experienced their second consecutive day of decline following Bloomberg Index Services' unexpected decision to defer including Indian debt in its flagship Global Aggregate Index. The development has dampened investor sentiment and raised concerns about future demand for Indian government securities.

Bond Market Performance

The benchmark 10-year bond performance reflected the market's disappointment with the index decision:

The yield increase indicates falling bond prices, as bond yields move inversely to prices. Market participants had widely expected the inclusion in Bloomberg's Global Aggregate Index to be nearly certain, making the deferral a significant surprise.

Bloomberg's Index Decision

Bloomberg Index Services explained that multiple respondents highlighted important operational and market-infrastructure considerations requiring further evaluation before inclusion. A trader with a state-run bank characterized this as "a big setback, as the market was hoping that inclusion would soothe sentiment and turn the demand-supply situation slightly favourable."

The exclusion represents a missed opportunity for Indian bonds to attract increased foreign investment flows that typically accompany index inclusion.

External Market Pressures

Traders are closely monitoring Middle East developments as oil prices continue rising. Brent crude reached a two-month peak on Tuesday amid concerns about potential disruptions to Iranian crude exports. Rising oil prices typically create inflationary pressures that can negatively impact bond markets.

Central Bank Support and Market Activity

Despite the negative sentiment, market participants expect support from the Reserve Bank of India:

Some traders believe the 10-year benchmark bond yield is unlikely to rise above 6.65% due to suspected purchases from the Reserve Bank of India. Additionally, investors from the 'others' category, which includes insurance companies, corporations, pension funds, and the RBI, have demonstrated strong buying interest.

Investor Activity and Market Outlook

Investors from the 'others' category have purchased bonds worth ₹124 billion ($1.37 billion) on a net basis over the previous three trading sessions. This represents nearly 2.5 times their purchase volume in the first six days of the year, indicating increased institutional interest despite the index setback.

In the rates market, India's overnight index swap rates witnessed shallow trading volumes, with activity concentrated in the longer end of the curve. The liquid five-year OIS rate was 2 basis points higher at 5.98%, while one-year and two-year swap rates saw no trading activity.

The Indian Government is considering new regulations that would require at least 50% local content for key components used in Battery Energy Storage Systems (BESS), according to reports from Mint. This proposed mandate represents a significant policy shift aimed at boosting domestic manufacturing in the energy storage sector.

Components Covered Under Proposed Mandate

The local content requirement would apply to several critical BESS components, creating opportunities for domestic manufacturers across multiple segments:

Policy Implications for Energy Sector

The proposed 50% local content mandate signals the government's commitment to developing indigenous capabilities in energy storage technology. Battery Energy Storage Systems play a crucial role in grid stability, renewable energy integration, and power backup solutions across various applications.

By excluding battery cells from the mandate while including other components, the policy appears to recognize the current manufacturing landscape and technological capabilities within India. The inclusion of battery management systems, energy management systems, containers, and inverters suggests these components are viewed as areas where domestic manufacturing can be effectively developed and scaled.

Manufacturing and Industry Impact

This potential mandate could significantly influence investment patterns and manufacturing strategies in the energy storage sector. Companies operating in the BESS space may need to reassess their supply chains and consider partnerships with domestic manufacturers to meet the proposed local content requirements.

The policy framework, if implemented, would likely encourage technology transfer, skill development, and capacity building in the energy storage component manufacturing ecosystem. It aligns with broader government initiatives to promote self-reliance in critical technology sectors while supporting the growth of renewable energy infrastructure.