Foreign holdings of Indian bonds poised to reach new highs on rate cut bets

Investors net purchased Indian government bonds under the Fully Accessible Route category worth 134 billion rupees ($1.5 billion) last month, the highest monthly inflow since March, according to Clearing Corp data.

“There are chances of a rate cut in December, plus the possibility that the central bank will start conducting open market bond purchases starting December or January to infuse liquidity in the system to also facilitate effective transmission of rate cuts,” said Alok Sharma, head of treasury at ICBC.Most bonds in the FAR category are part of three global bond indexes — JPMorgan, Bloomberg and FTSE Russell. The step-up in buying by foreign investors has pushed their ownership of FAR bonds to 6.9%, doubling in less than two years. October was the fourth consecutive month of net inflows into Indian bonds, and followed heavy selling in the first quarter of the financial year.

Flows last month also got a boost from a higher spread between Indian debt and U.S. Treasuries.”The yield differential with U.S. Treasury yields has risen, creating fresh interest in Indian bonds, that are still providing decent returns,” ICBC’s Sharma added. With an eye on rate cuts and easy liquidity conditions in the near-term, foreign investors have in the last few weeks ramped up their holdings of the 7.38% 2027 bond and the 7.06% 2028 bond, the two shortest maturity index-eligible bonds.

Percentage-wise, these two papers are the top two holdings of foreign investors, while in terms of quantum, both rank in the top five.

Capital Economics and MUFG forecast interest rate cuts by the Reserve Bank of India in December as well as February.

($1 = 88.7850 Indian rupees)