Global funds have significantly increased their investments in Indian government bonds, escalating by 46 times to $631 million last week, following the Reserve Bank of India's (RBI) assertive measures to defend the rupee. This surge in investment indicates a growing market confidence, spurred by the central bank's interventions in the currency market.

According to data from the Clearing Corporation of India Ltd., global funds purchased 55.51 billion rupees ($631 million) worth of Indian debt accessible to foreign investors last week, a substantial increase from the 1.21 billion rupees bought in the previous week. The rupee experienced a surge of nearly 1% last Wednesday after the RBI intervened to counter speculative attacks against the currency. Sources familiar with the matter suggest the RBI is prepared to continue its interventions until the rupee stabilizes at a stronger level.

The RBI's actions have successfully lifted the rupee from near-record lows, consequently enhancing the returns on Indian bonds. These bonds are now on track to outperform their emerging market counterparts for the second consecutive month. The yield on the 10-year bond is currently around 6.5%, making it one of the highest in the region.

Yifei Ding, a senior portfolio manager for fixed income at Invesco Hong Kong Ltd., noted that the relatively high yield levels offered by onshore rupee bonds, coupled with a stable or appreciating rupee, is a positive sign. Ding believes that a strong rupee will attract more investors to Indian government debt, allowing them to capitalize on the high carry gains from holding high-yield assets.

The rupee has seen its most significant gains in four months against the dollar, bolstered by the central bank's engagement in both offshore and onshore markets. This intervention has narrowed the rupee's year-to-date losses against the dollar to 2.6%, although it remains the worst-performing Asian currency after the Indonesian rupiah. So far in October, rupee-denominated bonds have yielded a 1.9% return for investors, compared to a 0.2% return for a broader Bloomberg gauge of local emerging-market debt.

However, after a two-day holiday break, Indian government bonds experienced a slight dip due to a lack of strong buying catalysts, leading to a supply-demand mismatch. As of 10:40 a.m. IST, the yield on the benchmark 10-year note stood at 6.5306%, compared to its previous close of 6.5040% on Monday. The Indian debt market was closed on Tuesday and Wednesday for local holidays. The 10-year yield has mostly remained above 6.50% throughout the month, except for a brief period on October 15 before the release of the central bank's policy meeting minutes.

Traders have noted that the 10-year yield's failure to close below the critical level, due to heavy profit booking by state-run banks, has dampened expectations for a significant decline in yields without a substantial catalyst. A trader from a private bank mentioned that breaking the 6.50% level now seems unlikely, as the market has reverted to unfavorable demand-supply dynamics.

The RBI's interventions in the currency markets include building short U.S. dollar positions of at least $15 billion in the non-deliverable forwards market over the past few weeks. This marks a notable return to a market segment where the central bank had previously reduced its presence. These interventions occur against a backdrop of the rupee hitting new lows against the U.S. dollar, influenced by record outflows from local stocks and concerns over potential U.S. tariffs.