From May 8 to 22, foreign portfolio investors’ holdings of fully accessible route (FAR) Indian government bonds increased ₹3,304.8 crore to ₹1.6 lakh crore, showed latest data on the Clearing Corporation.
With the latest US inflation data showing a sharper-than-expected easing in price pressures after months of the gauge remaining stubbornly elevated, American bond yields have declined sharply in May, increasing the appeal of high-yielding Indian fixed-income instruments.
“There was this hint a couple of months back that the Federal Reserve might just keep rates high for a very, very long time. That took 10-year US yields to around 4.75% from close to 4% earlier,” said Hitendra Dave, CEO, HSBC India. “I think the bulk of the reversal was to align with global yield movements. As those yields have normalised a little, we are seeing a reversal of the FPI action in Indian government bonds.”
Yield on the 10-year US bond was at 4.42% on Wednesday, while the Indian 10-year bond yield closed at 6.99%, the first time since June 2023 that the yield fell below 7%. Bond prices and yields move inversely.From late March, FPIs had embarked on a selling spree of FAR government bonds as the unexpectedly high US inflation prints and upside surprises in American employment data had pushed away hopes of the Federal Reserve commencing on rate cuts further into the horizon.From 1.77 lakh crore on March 21, FPIs’ holdings of FAR securities fell by 16,290 crore to 1.60 lakh crore on May 8 before the recent reversal, the data showed.The inclusion of Indian sovereign debt in JP Morgan’s emerging market bond index from June 28 is likely to bring about a stable overseas flow into the local market.
“From June onwards, my broad expectation is that we will see flows in the region of around $2 billion every month because once investors come in and start investing in this country, they will realise that it’s a very deep market, a very liquid market,” said Vikas Jain, head of India trading, fixed-income, currencies and commodities, Bank of America.
“The KYC (know your customer) is broadly a one-time exercise, but once you’ve done it, the settlement process is well-established. The macros also look very favourable for Indian bonds.”
The inclusion in the JP Morgan index will be phased over a 10-month period, with analysts broadly expecting overseas investment of $20-30 billion to flow into the local market as a result. Indian debt will also be included in a Bloomberg index starting January 2025.