Indian Bond Market and Currency Surge

Bond Yield Trends

• The yield on the benchmark 10-year government bond has dropped to 6.62%, the lowest level in three years.
• This week saw an 8 basis point decline, the sharpest weekly fall since November 2024.
• Market sentiment is driven by expectations of continued monetary policy easing, with a 25 bps repo rate cut in April already priced in and another cut in June anticipated.
• Forecasts suggest yields could soften further to around 6.60% by the end of the fiscal year.

Strong Foreign Inflows

• Foreign investors have made substantial investments under the Fully Accessible Route (FAR):
  • ₹8,560 crore in net inflows this week.
  • ₹644 crore invested on Friday alone.
• March is set to become the strongest month for foreign debt inflows since August 2024, with ₹8,497 crore invested up to mid-March.
• Total foreign portfolio investments in government securities under FAR have reached ₹2.96 trillion, close to the ₹3 trillion milestone.

Rupee Strength

• The rupee has appreciated to a 10-week high, closing below ₹86 per dollar.
• It logged its best weekly performance in two years, rising 1.1% this week.
• The rupee has outperformed other Asian currencies so far this month, reflecting robust foreign interest and stable macroeconomic fundamentals.

Key Drivers Behind the Rally

• Softer inflation data has strengthened expectations for RBI rate cuts.
• Global dovish signals, including the U.S. Federal Reserve’s indication of rate cuts ahead, have encouraged foreign inflows.
• Strong domestic growth forecasts and continued government reforms have further boosted investor confidence.

Implications and Outlook

• The sharp decline in bond yields reduces borrowing costs for the government and corporates, potentially supporting capital expenditure and growth.
• Strong rupee performance may ease import costs but could affect export competitiveness if the trend continues.
• If anticipated rate cuts materialize, both bond and currency markets may continue to see sustained inflows.
• Crossing the ₹3 trillion FAR investment mark will position India as a key destination for global debt investors, increasing market depth and liquidity.