Indian benchmark yield dips for third straight quarter amid index inclusion

Indian government bond yields ended little changed on Friday, but the benchmark bond yield declined for the third consecutive quarter, as the country's sovereign debt started getting included in a widely tracked global index.

The benchmark 10-year yield ended at 7.0095%, following its previous close of 6.9992%. It fell five basis points (bps) in the April-June quarter, after easing by 4 bps and 12 bps in the previous two quarters.

"Foreign inflows picked up in June, but many have already front-run the inclusion deadline. Hence, for yields to decline further from here, we may need some other triggers in the coming days," said Vijay Sharma, senior executive vice president at PNB Gilts.

Government bonds turned volatile in June as exit polls of the general election result and the actual result were starkly different.

Heavy selloff was seen on the result day as Prime Minister Narendra Modi-led Bharatiya Janata Party secured 240 seats in the 543-member parliament and became dependent on allies for the first time to form the government.

Meanwhile, most Indian government bonds under the Fully Accessible Route (FAR) were included in the JPMorgan emerging market debt index from Friday.

These papers have already seen inflows nearing $11 billion since the inclusion's announcement last September.

Yields on the bonds were unable to decline meaningfully on the day of the much-awaited inclusion amid underwhelming inflows.

Traders had been betting on inflows of up to $2 billion spread over Thursday and Friday but pointed out to flows that were just over one-fourth of the size.

JPMorgan strategists said 32%-40% of the expected $20-25 billion of flows have already played out, while Morgan Stanley said investors have allocated 3.6% of holdings to the country's bonds as of the end of May.

Meanwhile, the 10-year U.S. yield was above 4.30%, with investors awaiting a key inflation gauge - due after Indian market hours later in the day.