Analysts said foreign funds will continue to reduce their stake in India’s government debt after JP Morgan’s delay in including the country’s bonds in its global index has led to a further rise in yields.
“Since mid-September we have seen outflows on expectations that the index may not be included in 2022,” said Nagraj Kulkarni, co-head of Asia rates strategy excluding China at Standard Chartered Bank. “There is still room for more outflows from bonds.”
Earlier this week, JPMorgan said India is on the radar to join its influential emerging market local currency debt index after the review, which is expected to add to Asia’s third-largest economy this year.
Some investors cited investment constraints, “including a lengthy investor registration process and necessary operational readiness for trading, settlement and custody of assets,” JPMorgan said in its statement.
The development followed a sell-off in Indian government bonds with benchmark yields rising nine basis points on Thursday. It was trading at 7.46% last time.
Foreign investors and banks became buyers of Indian bonds in July-September, only on condition that India can be included in the global index, some foreign brokerages predicted after a review this month.
Foreign investors had net purchases of 100 billion Indian rupees ($1.21 billion) of bonds under the fully accessible route or FAR in July-September.
There is no investment limit for bonds under FAR.
Some economists said a delay in index inclusion, along with an increase in US yields and higher oil prices, would affect investor appetite for local debt.
Swati Arora, senior economist at HDFC Bank, said, “There is more than one risk to the bonds. First, an increase in the Fed and thus US yields is likely to increase domestic bond yields.”
Further, Arora pointed to the possibility of RBI taking up the repo rate from 5.90% to 6.50% by March. focus on supply
With index inclusion stakes cracking for the near term, market participants will now focus on the massive supply of bonds earmarked for the rest of this financial year.
Kulkarni of Standard Chartered Bank said, “Supply pressure could put pressure on bond yields.
The benchmark bond yield will trade in the 7.50%-7.75% range for the quarter, he added.
India’s federal government aims to raise Rs 5.92 trillion gross borrowing via bonds in October-March, while states plan to raise Rs 2.53 trillion in the December quarter. The borrowing of the states may increase further in the last quarter of the financial year.
Ashish Aggarwal, Head of FX and EM Macro Strategy Research, Asia at Barclays, said, “Heavy state debt supply and slight changes in the structure towards longer segments could weigh on 10 years and more.
“Demand is likely to remain on the defensive as investors factor in higher funding rates and residual tightening risks,” Agarwal said.
Meanwhile, supply and demand mismatch, tight liquidity conditions will impact bonds, said HDFC Bank’s Arora.
This story has been published without modification in text from a wire agency feed.
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