Foreigners step up India bond purchases before anticipated interest rate cut
Foreigners have net bought 182 billion rupees ($2.09 billion) worth of debt in the past seven days, surpassing the aggregate purchases from these investors in the previous 19 weeks, clearing house data showed.
"I would expect the central bank to start with a token rate cut of 25 basis points this week," said Ashhish Vaidya, managing director and treasurer of global financial markets at DBS Bank India.
Portfolio managers that are underweight on Indian bonds have started rebalancing their portfolios, as they might not want to miss out on the rally and underperform the global bond indexes, Vaidya said.
Overall foreign purchases of Indian bonds with no investment limit have surpassed the $20 billion mark since JPMorgan announced the inclusion of Indian debt in September 2023.
The RBI's monetary policy decision is due on Friday and markets widely expect a 25-basis-point rate cut.
Expectations were further bolstered by the central bank's announcement of a mega liquidity infusion package and its bond purchase in the secondary market.
The 10-year benchmark bond yield has eased 20 basis points from its highs hit three weeks ago, while overnight index swap rates have dipped by over 30 basis points in the same period.
Investors point to the risk of reversal of these flows, especially from shorter-term bonds, if the central bank does not deliver a rate cut.
"RBI's inaction could lead to disappointment and a sell-off in bond markets, pushing bond yields higher. The lack of a rate cut could increase volatility in bonds as investors reassess their positions," said Manish Bhargava, CEO at Straits Investment Management.
"Without a cut, 2-year and 5-year bond yields could rise as markets push out rate cut expectations."
($1 = 87.1520 Indian rupees)
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