Foreign investors turn sellers in government bonds after two months of strong buying
Foreign investors have sold Indian government bonds since August. Global yields have risen significantly, impacting investment decisions. Bloomberg's decision to defer local debt inclusion also affected flows. Higher yields in developed markets narrowed the differential with Indian rates. Market participants anticipate largely neutral flows in the near future.
Mumbai: Foreign capital began exiting Indian government bonds after a surge in buying three months ago, driven by factors including high global yields, Bloomberg's decision to postpone incorporating Indian debt into a key index, and the likelihood of a rate hike. Over the past three months, foreign portfolio investors sold ₹987 crore worth of government bonds, compared to net purchases of ₹49,355 crore in June and July through the Fully Accessible Route (FAR).
Abhishek Upadhyay, an economist at ICICI Securities, noted that global risk-free rates are increasing, and AI-related investments are being directed towards other countries, making it challenging to see inflows. Additionally, some investors are waiting for a rate hike before entering the market. The US 10-year treasury yield reached 4.81%, its highest since November 2023, while Japan's 10-year government bond yield surpassed 3% for the first time since 1996.
Euro zone borrowing costs, measured by Germany's 10-year bond yields, also rose to their highest level since 2011. High yields in developed markets have narrowed the gap with Indian rates. Moreover, Bloomberg Index Services' decision in late July to exclude local debt from its flagship Global Aggregate Index, a benchmark for funds managing approximately $70 trillion in debt globally, dealt a significant blow to Indian bonds.
Dhiraj Nim, an economist and FX strategist at ANZ Bank, suggested that it is unlikely for debt inflows to increase unless global rates ease. High global rates have hindered portfolio flows, despite stable inflation and a strong currency. While market participants do not anticipate a sharp surge of inflows or outflows, they foresee a period of largely neutral flows.
Any buying activity may come from global investors with dedicated India or broader Asia mandates, according to economists.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
