MUMBAI, Dec 15 (Reuters) – Foreign investors in Indian government bonds have turned cautious, selling the most global index-linked debt in over half a year last week, as rate-cut bets fade, bond supply stays heavy, and the rupee weakens.
Foreign funds net sold over 54.3 billion rupees (nearly $600 million) of bonds that are linked to global indexes last week, in their worst selloff since the week ended May 30, clearing house data showed.
WHY IT’S IMPORTANT
Foreigners currently own less than 3.5% of total Indian bonds. New Delhi wants that share to rise as government borrowing is set to be elevated for the next few years and as banks look to reduce their holdings to meet rising credit demand.
Sustained foreign inflows also help the local currency and improve the chance of inclusion in global indexes.
BY THE NUMBERS
Foreigners slashed positions from both the shortest and longest maturity index-linked papers, with net sale of 27 billion rupees in the 2053 note and 14.8 billion rupees in the 2027 note.
Overall foreign holding of index-linked bonds eased 17 basis points last week to 6.85%.
KEY QUOTES
A potential bilateral trade deal with the U.S. along with Bloomberg Global Aggregate Index inclusion should benefit flows going forward, said Wontae Kim, portfolio manager at Western Asset Management.
“We are not reallocating away from local currency Indian bonds to hard currency Asia bonds,” he added.
“We have turned more positive towards Indian bonds as both bonds and the INR have further cheapened.
We expect the potential announcement of better trade deals between the U.S. and India will provide a good boost to rupee bonds’ performance,” said Yifei Ding, senior portfolio manager, fixed income at Invesco.
GRAPHIC
MARKET REACTION
Indian government bond yields rose last week, with the 10-year benchmark bond yield jumping 10 basis points, the biggest weekly increase in four months.
WHAT’S NEXT
Foreign investors will now watch the Reserve Bank of India’s bond market purchases and next financial year’s borrowing target.
($1 = 90.7100 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Eileen Soreng)
