Local bonds may not be considered for listing on a major global index this year capped gains after the dollar fell and oil prices tumbled on Tuesday.
The partially convertible rupee ended up just 0.05 per cent at 81.58 per dollar, having touched a session high of 81.31. The currency had fallen for four days in a row, hitting a new record low of 81.6525 on Monday.
Local government bonds will likely be included in the emerging market global index early next year, as New Delhi still needs to address various operational issues after Reuters reported that local government bonds will likely be included in the emerging market global index early next year.
There had been a lot of optimism about India's inclusion as it would have brought inflows of around $30 billion and a decision was expected as early as this month.
Anitha Rangan, an economist with Equirus Group, said there was a hesitant opinion on India's side about bond index inclusion because it could bring in volatile flows.
She said that the Indian central bank probably didn't support the currency as much as in the past few weeks because of the sudden decline of the rupee.
Risk sentiment seemed to be improving as Asian currencies made small gains, but worries about the dollar resuming its upsurge due to tighter monetary policy conditions.
The dollar index was down 0.3 per cent to 113.76 by 0956 GMT, a rebound from two-decade highs. It had gained almost 4 per cent last week on the back of hawkish Federal Reserve comments.
India is a major oil importer and the price of crude hit a 9 month low overnight, which bodes well for the rupee as it drops 12 per cent this month.
A fund manager at a large global fund said that local bond settlement rules, tax complexities and the way in which investors will repatriate dollars are some operational issues that need to be resolved. Index investors tend to favor international settlement platforms such as Euroclear, but India wants to settle bonds onshore, like China.
India is working to get its bonds included, but operationally it is not ready for it, a source told Reuters.
India has been trying to be included in global bond indexes since 2013 but that ambition has been held up by a number of factors over the years and only began considering India's inclusion in its global bond index in 2021.