ite way was supply: big auctions can push yields up if buyers demand a higher return to absorb all that new debt. But investors also have fresh reason to show up. The Reserve Bank of India said last week it will let banks raise foreign-currency deposits from non-residents while the central bank absorbs the cost of hedging the currency risk, and it offered state-run firms a 150-basis-point discount on hedging for overseas fundraising. Those steps effectively make it cheaper for overseas money to take “hedged” rupee exposure, which can support demand when issuance is heavy.
Why should I care?
For markets: The RBI’s 150-basis-point hedge discount can steady demand at a 320 billion-rupee auction.
Foreign investors don’t just compare India’s bond yield with other countries; they also factor in what it costs to protect themselves if the rupee falls. When the RBI absorbs or discounts those hedging costs, the net return on a hedged Indian bond looks better, and banks and dealers are more willing to intermediate that foreign demand. That can help keep yields from jumping on high-supply days, like this week’s sale, and helps explain why the 6.94% 2036 yield could stay “range-bound” even when new issuance would normally push it higher.