Foreign portfolio investors, having splurged on government bonds ahead of India’s inclusion in global indices, offloaded ₹3,966 crore (around $450 million to $475 million) worth of sovereign debt in a single day when the rupee weakened past successive technical levels amid a retreating Chinese yuan and lack of significant market interventions by the Reserve Bank of India.
Clearing Corporation of India (CCIL) data showed that FPIs reduced their holdings of 14 government bonds on Friday, including the most liquid 10-year benchmark security.
Treasury executives said that a bulk of the FPI flight on Friday came from investors that had opted to take unhedged exposure to Indian assets, given the marked lack of volatility in the rupee over the past year.
“They are bullish on the currency and the economy, and they’re bullish on the assets. Therefore, they come in and buy the assets and tend not to hedge. Moreover, because the volatility is so low, it doesn’t make a lot of sense to pay the hedging cost against the position,” said Patrick Law, head of Asia Pacific fixed income, currencies, and commodities trading at Bank of America.
The rupee on Friday ended local onshore trading at a record low of 83.43/$1, 0.3% weaker than previous close, before plunging to as much as 83.79/$1 in the offshore non-deliverable forwards market. A depreciating rupee erodes FPIs’ returns from domestic assets, especially if the exposure is unhedged.FPIs have bought close to $10 billion worth of fully accessible Indian government bonds since September 22, the day that JP Morgan announced the inclusion of domestic bonds in its emerging markets index from June 2024.Along with an optimistic view on India’s GDP growth, a key factor that has made the country stand out amongst international investors over the past year is the lack of volatility in the rupee despite a tumultuous global environment. So far in 2024, the rupee has depreciated 0.09% versus the US dollar, outperforming 10 other Asian currencies, Bloomberg data showed.
A major reason behind the rupee’s stability has been regular market interventions by the RBI, which has stepped in to either rein in appreciation or stem depreciation in the local currency through dollar sales or purchases, traders said. In the absence of the central bank’s presence on Friday, investors who had bet against the US dollar racked up huge losses and then scrambled to square off those positions, thereby exacerbating the rupee’s weakness.