Foreigners Dump Record Indian Bonds as Weak Rupee Erodes Returns
Impact of Currency Weakness on Indian Bonds
Foreign investors are significantly reducing their exposure to Indian bonds, driven by the rupee’s decline and changing expectations around interest rates. This trend has resulted in record monthly outflows from Indian sovereign bonds, particularly those that are eligible for inclusion in global indexes.
– Record Outflows: Global funds have sold approximately ₹143 billion ($1.6 billion) worth of bonds in December alone, marking the highest monthly outflow since the introduction of the Fully Accessible Route in 2020.
– Forecasts of Continued Outflows: Analysts from Standard Chartered Plc expect this trend to persist in the upcoming months due to ongoing economic pressures.
Factors Contributing to Investor Sentiment
The depreciation of the rupee and the Indian central bank’s signals regarding the end of its interest-rate cut cycle are weighing heavily on investor sentiment.
– Rupee’s Record Low: This month, the rupee experienced a series of record lows against the dollar, adversely affecting foreign investor returns. For euro-based investors, total returns have plunged by a staggering 10% this year, contrasting sharply with gains seen in currencies like Hungary’s forint and the Mexican peso.
Market Dynamics and Future Outlook
The recent selloff of Indian bonds has led to an increase in government borrowing costs, amidst heavy state debt issuance. Expectations for further interest-rate cuts appear to be dwindling as higher inflation looms on the horizon.
– Year-End Selling Pressure: Factors such as profit-taking and increased activity in interest-rate derivatives have contributed to the recent foreign selling. Vikas Jain from Bank of America noted that investors are repositioning their bond holdings in response to fluctuating swap rates.
Potential Shifts in Momentum
While current trends are concerning, several factors could reinvigorate foreign interest in Indian bonds.
– Impact of Trade Agreements: Should a long-awaited trade deal with the US materialize, it might alleviate pressure on the rupee, potentially attracting investment back into local bonds. Analysts from Australia and New Zealand Banking Group estimate the rupee could strengthen up to 1.5% to ₹88.5 per dollar if an agreement is reached.
– Increased Global Index Inclusion: There is speculation that India may gain inclusion in more global bond indexes in the near future, which would likely enhance foreign demand for Indian debt. Already, India’s index-eligible bonds participate in JPMorgan Chase & Co.’s widely recognized emerging market gauge.
In conclusion, while the current trend of foreign investors dumping Indian bonds is concerning, potential market adjustments and global developments may present opportunities for recovery. As attention turns toward possible policy changes and international agreements, the outlook for Indian bonds could shift positively in the coming year.