Foreign holdings of Indian bonds poised to reach new highs on rate cut bets

 

Indian twenty rupee currency notes are displayed at a roadside currency exchange stall in New Delhi, India, May 24, 2024. REUTERS/Priyanshu Singh Purchase Licensing Rights, opens new tab

MUMBAI, Nov 3 (Reuters) - Foreign investors increased their exposure to Indian government bonds in October by the most of any month so far this financial year, the latest data showed on Monday.

Investors net purchased Indian government bonds under the Fully Accessible Route category worth 134 billion rupees ($1.5 billion) last month, the highest monthly inflow since March, according to Clearing Corp data.

"There are chances of a rate cut in December, plus the possibility that the central bank will start conducting open market bond purchases starting December or January to infuse liquidity in the system to also facilitate effective transmission of rate cuts," said Alok Sharma, head of treasury at ICBC.

Foreign investors accelerated selling of Indian bonds in Apr-May

Most bonds in the FAR category are part of three global bond indexes -- JPMorgan, Bloomberg and FTSE Russell. The step-up in buying by foreign investors has pushed their ownership of FAR bonds to 6.9%, doubling in less than two years.

Foreign investors boost holdings of India bonds under FAR

October was the fourth consecutive month of net inflows into Indian bonds, and followed heavy selling in the first quarter of the financial year.

Flows last month also got a boost from a higher spread between Indian debt and U.S. Treasuries.

"The yield differential with U.S. Treasury yields has risen, creating fresh interest in Indian bonds, that are still providing decent returns," ICBC's Sharma added.

Spread between India, U.S. 10-year bond yield rises

With an eye on rate cuts and easy liquidity conditions in the near-term, foreign investors have in the last few weeks ramped up their holdings of the 7.38% 2027 bond and the 7.06% 2028 bond, the two shortest maturity index-eligible bonds.

Percentage-wise, these two papers are the top two holdings of foreign investors, while in terms of quantum, both rank in the top five.

Capital Economics and MUFG forecast interest rate cuts by the Reserve Bank of India in December as well as February.

Over 50% of foreign holding of India bonds concentrated in 10 securities