The government bonds and rupee settled steady on Thursday despite rising US Treasury yields, as the Reserve Bank of India (RBI) intervened in the foreign exchange market through dollar sales, and bond market participants stocked up on optimism regarding the inclusion of bonds in international indices, dealers said.
The rupee settled at 83.09 a dollar on Thursday, against 83.08 per dollar on Wednesday. Whereas, the yield on the benchmark 10-year government bond settled at 7.16 per cent, against 7.18 per cent on Wednesday.
"USDINR spot closed flat, as central bank intervention capped the advance but demand for US dollars from oil marketing companies limited the downside. Rally in the US Dollar Index post hawkish commentary from the US Federal Reserve was negative for the Indian rupee. Over the near term, we expect a range of 82.80 and 83.30 on spot," Anindya Banerjee, vice-president of Currency Derivatives and Interest Rate Derivatives at Kotak Securities Ltd, said.
The yield on the benchmark 10-year bond touched the day's high of 7.21 per cent, tracking the rise in US Treasury yields post hawkish remarks by the US Federal Reserve.
"Today, the G-sec market disregarded the rise in US yields and dollar after the hawkish pause by the Fed as the pressure points induced by Fed outcome are negated by strong expectation of Indian bonds' inclusion in global bond indices during this month-end review," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said.
Dealers said foreign banks were speculated to be the major buyers on Thursday.
"Foreign banks were buying because they would know the best in this matter," a dealer at a state-owned bank said.
"If the bond inclusion doesn't happen, the benchmark bond yield will move up to 7.30-7.35 per cent within a week," he added.
The momentum surrounding the potential inclusion of Indian government bonds in global bond indices gained traction following the release of a report from an inter-departmental group within the RBI the previous month.
It underlined that the benefits derived from incorporating government bonds into global indices outweigh the associated risks.
In 2022, prominent index providers, including JP Morgan and FTSE Russell, maintained their interest in Indian government bonds by retaining them within their watch lists.
A review is due at the end of September, the end of the current quarter.
The previous week, traders had rushed to buy bonds after reports that the chances of bond inclusion in JP Morgan's emerging market index have become high after Russia's exit.