From July 31 to August 30, the indicative value of foreign portfolio investors’ aggregate holdings in fully accessible route (FAR) government bonds increased by ₹23,914 crore, or around $2.85 billion, to ₹2.29 lakh crore, an analysis of official clearing house data showed. The inflow topped the broad market expectations of around $2 billion of average monthly inflows following the inclusion of local debt in a JP Morgan index.
“The moment the US rates start to come off, it will give a fresh lease of life to emerging market debt and the JP Morgan inclusion has tilted the whole thing in favour of India,” said Ashhish Vaidya, head of treasury and markets at DBS Bank. “While the JP Morgan inflow has to keep coming in, it’s gaining pace because the global portfolio managers are now actively trying to get into the index.”
ETMarkets.comCompared with July, August netted $500 million more, the data showed. The odds are now lower that overseas flows into Indian bonds will surprise on the upside as a much-desired ‘soft landing’ in the US seems to be materialising, sustaining the risk appetite for emerging market assets.”We’ve already seen a dip in yields in the US, so it makes sense to diversify. This is just the start for India bond inflows,” Vaidya said. “What you could see is that the flows in the future could be quite aggressive once the Fed rate cuts actually start.”The US Federal Open Market Committee will detail its next policy statement on September 18. The US central bank is widely expected to announce a rate cut of 25 basis points, two-and-a-half years after it embarked on one of its most aggressive monetary tightening cycles in decades.Fed chair Jerome Powell said last month that the time had come for policy to adjust and that the timing of rate cuts would depend on incoming data.
While a Fed rate cut has been long desired by markets across the globe, for emerging markets, the US central bank’s rationale for lowering interest rates assumes particular importance. If the Fed were to cut interest rates in response to economic distress in the US – as was feared after a few weak data sets in early August – global investors would turn risk averse and keep an arms’ length from emerging markets, bond traders said.
However, with recent data prints, including GDP data, pointing to a resilient US economy, emerging markets stand to attract more foreign flows as interest rates in the world’s largest economy descend.
“India is an emerging market with strong fundamentals…. yes this (recent inflow) is slightly larger than expected and it’s a mix of passive and active flows. The 10-year yield in FY25 should touch a low of 6.65-6.70% but the path to the downward yield is going to be gradual as the RBI is clear in its anti-inflationary stance,” said Vijay Sharma, senior executive vice president at PNB Gilts.