In recent sessions, foreign investors have shown renewed interest in Indian government bonds, with net purchases exceeding Rs 9,000 crore ($1.06 billion) over the last four sessions.

Manish Bhargava, CEO at Straits Investment Management, noted that India's high yields present an appealing carry trade opportunity for investors.

Overall, market participants largely expect the RBI to implement measures that could ease monetary policy in response to the current economic conditions.

Market participants are eagerly anticipating the Reserve Bank of India's (RBI) policy decision scheduled for December 6, 2024.

Weak economic growth data has heightened expectations that the RBI may act sooner to support the economy, with many anticipating a reduction in the cash reserve ratio (CRR) from the current 4.5%.

A potential 50 basis point reduction in the CRR could inject approximately Rs 1.1 trillion into the banking system, significantly boosting demand for bonds.

The yield on 10-year bonds has decreased to three-year lows, with the spread between bond yields and the repo rate reaching a seven-year low, indicating potential monetary easing.

However, in November, foreign investors had heavily sold bonds, with net selling in the Fully Accessible Route (FAR) exceeding Rs 10,000 crore due to elevated US yields following the 2024 presidential election.

Economist Dhiraj Nim supports the idea of a rate cut, citing significant downside risks to growth and a negative output gap.

The favorable outlook on bonds is largely driven by the anticipation of monetary policy easing, which is influencing increased investor inflows.

Despite the previous sell-off, the attractiveness of yields and the rupee's relative stability among emerging market currencies have driven renewed demand for bonds.