Indian government bonds experienced a decline on Thursday as traders adopted a cautious stance ahead of the upcoming weekly debt sale. Market participants are preparing for what could be a challenging auction given the current environment of weakened investor appetite, despite ongoing support from the central bank.

Bond Market Performance

The benchmark 10-year government bond yield movement reflected the market's cautious sentiment:

Central Bank Intervention

The Reserve Bank of India has implemented an aggressive bond purchasing program to support the market. However, the strategy's effectiveness has been limited by specific operational choices:

Despite this substantial intervention, overall market demand has been dampened by the central bank's preference for purchasing less-traded bonds during these operations. Additionally, the heavy upcoming supply from state governments has contributed to the weakened market appetite.

Upcoming Debt Auction

New Delhi has scheduled a significant bond sale for Friday, featuring longer-duration securities:

Market Outlook and Key Events

Traders are monitoring several upcoming developments that could influence monetary policy direction. Inflation data scheduled for release on Monday will provide crucial insights, particularly following India's projection of 7.40% GDP growth for the fiscal year.

Abhishek Bisen, fixed income head at Kotak Mutual Fund, expects the RBI to maintain accommodative policies. He anticipates the central bank will keep liquidity conditions easy and maintain relatively lower interest rates, projecting that inflation will remain benign while growth may weaken in coming quarters.

Another significant development awaited by market participants is the potential inclusion of Indian bonds in the Bloomberg Aggregate Index, with an announcement expected as early as next week.

Interest Rate Movements

Overnight index swap rates moved higher on Thursday, aligning with the broader bond yield trend:

The synchronized movement across different tenures indicates broad-based pressure on the interest rate environment as markets adjust to supply-demand dynamics and policy expectations.

Indian government bonds remained largely unchanged in thin early trading on Thursday, as traders focused their attention on the upcoming debt sale amid a lack of major market catalysts. The benchmark 10-year 6.48% 2035 bond yield stood at 6.61% as of 10:05 a.m. IST, compared to Wednesday's closing level of 6.61%.

Bond Market Performance

A trader with a state-run bank noted the absence of significant market drivers, explaining that "there is nothing to look forward to for the day, and hence traders will now become active only on the auction day."

Upcoming Debt Auction and Supply Concerns

New Delhi is scheduled to auction ₹290 billion ($3.20 billion) worth of government bonds on Friday, comprising 15-year and 40-year securities. This auction comes at a time when state governments have announced plans to raise a record ₹5 trillion through bond issuances during the January-March quarter.

Despite the Reserve Bank of India 's aggressive debt buying program, bonds have remained under pressure due to supply concerns. The central bank purchased ₹500 billion worth of bonds earlier this week and is set to bid for twice that amount through additional purchases scheduled until January 22.

RBI's Bond Purchase Program

The RBI has maintained an unprecedented bond buying spree this financial year, purchasing a record ₹4.70 trillion in government securities. However, these substantial purchases have failed to alleviate market concerns about the heavy supply pipeline.

Market sentiment has remained subdued as the RBI has been selecting thinly-traded securities for these purchases, contrary to market expectations for inclusion of liquid papers and former benchmark bonds.

Bloomberg Index Inclusion Prospects

Traders are closely monitoring the potential inclusion of Indian bonds in the Bloomberg Aggregate Index, with an announcement expected as early as next week. Goldman Sachs estimates that such inclusion could generate inflows ranging from $10 billion to $20 billion, providing significant support to the bond market.

Interest Rate Swaps Market

India's overnight index swap rates showed mixed trading patterns with limited activity:

The swap market reflected the overall cautious sentiment as participants await clearer directional cues from the upcoming debt auction and potential policy developments.