Indian government bonds rallied on Wednesday, driving the benchmark yield below the key 6.80% mark, as tumbling oil prices and a central bank policy that was along expected lines boosted market sentiment.
The Reserve Bank of India held the repo rate as expected, as policymakers awaited clearer evidence on whether higher oil prices from the U.S.-Iran war were feeding into broader inflation pressures.
The decision diverged from recent moves by regional peers, including Indonesia and the Philippines, which have tightened policy to contain the war-driven inflation shock.
"The policy outcome was marginally more dovish than expected, particularly on the inflation outlook and liquidity-management approach," said Vikas Garg, head of fixed income at Invesco Mutual Fund.
"This should support bond markets and put downward pressure on yields, especially with healthy capital inflows expected in coming months."
India's benchmark 6.94% 2036 bond yield fell 4.5 basis points to a three-week low of 6.7722%. Bond yields move inversely to prices.
LIQUIDITY SUPPORT
Governor Sanjay Malhotra said the RBI would maintain "sufficient" liquidity to keep the weighted average call rate aligned with the repo rate.
The liquidity signal spurred demand for the five-year bonds, which has already seen rising interest due to the RBI's dollar mobilisation schemes.
Indian banks have received $36.7 billion in FX non-resident deposits through July 31.
Meanwhile, Brent crude fell 5.2%, extending Monday's more than 7% slide, easing inflation concerns for the world's third-largest oil importer.
RATES TUMBLE
India's overnight index swap rates slipped on the RBI's liquidity signal and lower oil prices.
The one-year swap rate fell 11 bps to 5.76%, the two-year OIS rate fell 12.25 bps to 5.9425% and the five-year rate declined 11.25 bps to 6.25%.
