Foreign Investors Sell Indian Government Bonds Amid Rate-Cut Uncertainty

Foreign Investors Become Cautious

Foreign investors in Indian government bonds have become more cautious, selling a large amount of global index-linked debt in the past week. This comes as expectations of interest rate cuts fade, bond supply remains high, and the Indian rupee weakens.

Key Statistics

Foreign funds sold over 54.3 billion rupees (approximately $600 million) of bonds linked to global indexes, marking their worst sell-off since May 30. This significant sale has reduced foreign ownership of Indian bonds, which currently stands at less than 3.5% of the total.

Why It Matters

The Indian government wants to increase foreign ownership of its bonds, as government borrowing is expected to be high for the next few years. Additionally, sustained foreign investment helps the local currency and improves the chances of inclusion in global indexes like the Bloomberg Global Aggregate Index.

Market Reaction

Indian government bond yields rose last week, with the 10-year benchmark bond yield increasing by 10 basis points, the largest weekly increase in four months. Foreigners reduced their positions in both short-term and long-term index-linked bonds, with a net sale of 27 billion rupees in the 2053 note and 14.8 billion rupees in the 2027 note.

Expert Insights

According to Wontae Kim, portfolio manager at Western Asset Management, a potential bilateral trade deal with the US, along with Bloomberg Global Aggregate Index inclusion, should benefit foreign investment in Indian bonds. Yifei Ding, senior portfolio manager at Invesco, also expressed a positive outlook, citing the potential announcement of better trade deals between the US and India as a boost to rupee bonds' performance.

What's Next

Foreign investors will closely watch the Reserve Bank of India's bond market purchases and the next financial year's borrowing target. The Indian government's ability to attract foreign investment will play a crucial role in determining the country's economic growth and bond market performance.

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