Foreign investors are set to net sell Indian bonds this month for the first time since April with a pickup in local inflation and a surge in US yields cooling appetite for rupee debt.
Overseas investors sold Rs 2,800 crore ($333 million) of the so-called Fully Accessible Route bonds in October, according to Clearing Corporation of India Ltd. data.
The outflows came as US Treasury yields climbed in recent weeks on bets the Federal Reserve may be slow to cut rates, narrowing the spread that Indian securities enjoy.
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Still, Indian bonds have been among the top performers in developing markets this year, and there’s little to indicate the outflows will deepen. India’s appeal is also driven by a stable currency.
“As yields adjust, attractive levels will draw demand as rupee-denominated benchmark bonds are currently the highest yielding in the region,” Radhika Rao, senior economist at DBS Group Holdings, wrote in a note.
Indian government bonds trail only Malaysia in terms of performance in 2024 among local currency emerging market Asian peers, with a 7.7% return, according to data compiled by Bloomberg.
Foreign inflows into index-eligible bonds or FAR bonds have been Rs 1.1 lakh crore this year so far, mainly driven by inclusion into JPMorgan Chase & Co.’s emerging-market index and other global indexes.
Inflows are likely to resume as the South Asian nation’s weight in the JPMorgan EM bond index continues to ratchet up by 1% each month through March. Sentiment also received a boost on FTSE Russell’s decision to include Indian bonds in its emerging market government debt gauge this month.
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