Indian government bonds extended their decline on Wednesday, with the benchmark 10-year bond falling to its lowest level in more than three weeks following Bloomberg's decision to exclude Indian debt from its Global Aggregate Index. The selloff reflects continued market disappointment over the deferred inclusion, which has dampened investor sentiment across the bond market.

Bond Yield Performance

The benchmark 10-year bond yield performance showed significant movement following the index announcement:

Bond yields move inversely to prices, indicating that bond prices have fallen as yields climbed to these elevated levels. The 10-year yield has risen 4.50 basis points since Bloomberg Index Services announced its deferral decision on Tuesday.

Bloomberg Index Decision Impact

Bloomberg Index Services postponed adding Indian bonds to its flagship Global Aggregate Index, stating it will issue another update by mid-year 2026. This decision has triggered widespread selling among most market participants, as investors had anticipated the inclusion would bring significant foreign inflows into Indian debt markets.

The index exclusion has created a challenging environment for Indian bonds, with market sentiment remaining sour following the announcement. Traders and investors are now reassessing their positions in Indian government securities.

Market Activity and Central Bank Intervention

Despite the broad-based selling, one category of investors has been actively purchasing bonds:

The "others" category includes the Reserve Bank of India, corporates, and insurers. Traders suggest this buying pattern indicates the central bank may be actively purchasing in the secondary market, particularly following the redemption of a security on Friday.

Trading Outlook and Risk Factors

Market experts are providing guidance on potential trading ranges and risk factors. Alok Sharma, head of treasury at ICBC Mumbai, noted that in the absence of index inclusion, the 10-year yield may gravitate towards the 6.65%-6.70% band, which could present attractive buying opportunities.

However, traders identified a key risk factor that could disrupt this outlook. The primary threat to buying in this yield range stems from potential escalation of Middle East tensions, which could significantly impact market dynamics.

Broader Market Implications

The bond market weakness has extended to other interest rate instruments. India's overnight index swap rates reflected the sour market sentiment:

Traders continue monitoring developments in the Middle East closely, as oil prices have been rising with benchmark Brent crude reaching a more than two-month peak on Tuesday. These geopolitical factors add another layer of complexity to the Indian bond market outlook.

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.