More Stories

Informist, Tuesday, Feb. 3, 2026

 

By Aaryan Khanna

 

NEW DELHI – Domestic markets reacted positively to India and the US announcing late Monday that they have agreed to a trade deal. However, for government bonds, the cheer evident Tuesday is unlikely to last long as the deal brings with it some unsavoury connotations.

 

India's benchmark share indices rose over 2.5% after US President Donald Trump announced on social media that the reciprocal tariff rate on India's exports to the US would now be 18%, against the 25% imposed in early August. Though an official announcement has not been made, the additional penal tariff of 25% may also be removed. The rupee rose 1.4% against the dollar, marking its best day in over seven years, due to the rosy outlook on exports and foreign portfolio investments into Indian markets.

 

The reaction in the bond market was positive but more muted with no direct benefit for fixed income assets seen from the deal. The 10-year benchmark gilt yield fell 4 basis points to 6.72%. The bulk of the reaction took place in early trade, with yields largely stuck in a range around that mark through the day.

 

After the trade deal, gilt dealers are expecting FPI flows to revive into fully accessible route government bonds, tied to the currency's rise. FPIs have net purchased less than $2 billion of these bonds since the beginning of the financial year in April as the rupee weakened amid the overhang of trade tensions. Gilts under the fully accessible route -- included in benchmark emerging market debt indices by JP Morgan, Bloomberg and FTSE Russell over the past two years -- could see some additional inflows as the rupee appreciates and domestic liquidity conditions ease. FPIs are particularly interested in bonds maturing up to three years, dealers said.

 

"If INR (rupee) appreciates, you will see flows into shorter tenor bonds," said Sudarshan Nambiar, head of trading at YES Bank. "FII flows will come in and the yield curve (for bonds) will steepen." The newly issued three-year 6.03%, 2029 gilt's yield fell 9 bps to 5.94% Tuesday.

 

The fall in yields follows their worst day in nearly six months on Monday. The 10-year benchmark yield had risen 7 bps after the government pegged its gross borrowing through dated securities at a record INR 17.20 trillion in its Budget for 2026-27 (Apr-Mar) presented Sunday. This was higher than INR 16.3 trillion estimated in an Informist poll of 30 analysts.

 

With the expected economic boost from the trade deal – which largely came as a surprise to bond market dealers – traders are now hoping the government may overshoot its revenue forecasts for FY27. Riding on India's strong economic momentum and with uncertainties from steep US tariffs now addressed, the government could end FY27 in a stronger fiscal position than projected in the Budget, Economic Affairs Secretary Anuradha Thakur told Informist in an interview Tuesday. For bond dealers, the hope is that the government buys back bonds to address its hefty redemptions in the coming years, including INR 6 trillion in FY28 alone.

 

At the same time, the stronger footing on growth dulled the market's expectation of monetary policy support to growth, including through rate cuts. In a note Tuesday, Bank of America switched its call of a 25-bps rate cut to a status quo at the Reserve Bank of India's three-day Monetary Policy Committee meeting that ends Friday.

 

"One, of course the growth slowdown should be corrected, to that extent less monetary policy support now," a trading head at a foreign bank said. "If growth is not bad then government finances should not worsen."

 

STUMBLING BLOCK OF SUPPLY

The silver lining to the rate view is that bonds had largely priced in the current repo rate of 5.25% as the terminal rate in the current cycle, with few bets attached to such a move. Instead, the bigger stumbling block may be the demand-supply equation.

 

The RBI has conducted or announced open market operations worth over INR 7 trillion so far in FY26, on track to set a record. Such support may not continue now that the India-US trade deal is done. The influx of dollars is expected to increase rupee liquidity in the domestic banking system should the central bank buy spot dollars. The expansion of the domestic balance sheet had come at a time when the RBI was constantly selling dollars in the spot market to protect the rupee's depreciation – the domestic unit had ended at a record closing low of 91.98 a dollar as recently as Friday.

 

"...problem is supply side. Right now, you can say for 1-1.5 months it is okay, but once April starts, then we'll again look at supply issues," the foreign banker quoted above said. "If RBI is not going to buy now, then somebody else has to. That's where FPI should come in."

 

However, the FPI inflows are not expected to significantly change demand-supply dynamics. If there are no further index inclusions, India's government bond market may attract between $3 billion and $5 billion in FPI flows in the remainder of 2026. For context, India's outstanding gilts total around $1.3 trillion. A key factor on getting more flows would be Bloomberg's decision on whether to include fully accessible route bonds in its Global Aggregate Index, which will be next reviewed in June. Traders remain uncertain about the inclusion materially bringing in FPI demand in FY27.

 

Adding to the record government bond supply is the expected pressure from state government borrowing. States have indicated they will raise a record INR 5 trillion in the March quarter. Their gross borrowing in FY27 is also estimated at INR 13 trillion or higher. Investors track the gross supply because if they roll-over their investment from a maturing security, the maturity profile of their portfolios increases, adding risk. With such a flood of bonds coming, traders will likely place their bets on bonds maturing in five years or below, where they know FPIs will chase supply, dealers said.

 

"We anticipate a muted movement in Indian Government Bond yields, with a preference for shorter-term bonds," said Sameer Karyatt, executive director and head of trading at DBS Bank India. "The existing INR system liquidity diminishes the immediate need for RBI Open Market Operations (OMO), and the demand-supply dynamics within the bond market are expected to maintain pressure on yields in the long-tenor segment."  End

 

US$1 = INR 90.27

 

Edited by Ashish Shirke

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.