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Economic Times
30-06-2025
- Business
- Economic Times
Bond rally cools just as another index inclusion nears
India's breakthrough into global debt markets needs a second act. ADVERTISEMENT Foreign investors have bought a net $20 billion of the nation's index-eligible sovereign debt after JPMorgan Chase & Co. announced India's inclusion to its benchmark emerging market index in 2023. Recent outflows have left total investments on the low end of estimates by analysts. This year's underperformance is stark given how emerging markets everywhere benefited from a 'Sell America' trade that spurred reallocations by investors. A Bloomberg index tracking the performance of EM local currency debt hit a record high in June, while other Asian nations from South Korea to Malaysia have seen renewed interest from funds. What's holding back India is a currency that has been left behind as almost every Asian peer strengthens against the dollar. The central bank's recent pivot away from more immediate monetary easing also spurred outflows, and highlights the need to attract sticky, index-tracking funds. The $3.4 billion of bond sales from April reinforces the call for more reforms before the nation joins another global debt benchmark in September.'Indian bonds primarily attracted active investors rather than passive, structural flows,' said Nitin Agarwal, head of trading at Australia and New Zealand Banking Group. 'The theme for active investment in India was monetary policy, which has now played out, and the bond rally is perceived to have run its course.' ADVERTISEMENT The nation's bonds officially entered JPMorgan's index in June last sovereign bonds posted a return of 2% in dollar terms in the second quarter, against 5% by a gauge of emerging-market debt. A rally in benchmark 10-year bonds earlier this year — with yields dropping by about 50 basis points — has more or less stopped. ADVERTISEMENT The monetary and currency policies of the Reserve Bank of India have become the key drivers for the nation's debt this year. After the RBI slashed its benchmark interest rate by 50 basis points in June, it switched to a neutral policy stance, signaling limited room for further the rupee's absence from the emerging market rally also has dampened appetite for Indian bonds. The currency is little changed versus the dollar this year, lagging well behind the Taiwan dollar's 13% surge and the South Korean won's 8.6% gain. ADVERTISEMENT 'For foreign investors, total returns in local currency bonds are driven by both bond returns and FX returns,' said Nagaraj Kulkarni, co-head of Asia rates (ex-China) at Standard Chartered Plc in Singapore. 'On the FX, the rupee has been an underperformer in the region even in the recent bout of USD weakness.'The RBI's decision to build up foreign reserves to fend off rising economic and geopolitical risks has weighed on the rupee, and the recent bond outflows have in turn further pressured the currency. ADVERTISEMENT The outflows from April have prompted policymakers to act. The Securities & Exchange Board of India relaxed some rules in June for overseas investors, while the RBI allowed the operation of electronic trading platforms to facilitate more foreign reforms will be needed, according to investors such as Kenneth Akintewe, head of Asia sovereign debt at Aberdeen Investments. Chief among the structural hurdles is the nation's high tax burden. There's a 20% interest income levy, while short-term capital gains on bonds can be as high as 30%.'When you are managing a global portfolio, it is easier to ignore or bypass a market if there are too many impediments to accessing the market,' said there's optimism among some investors that India's debt markets will bring in more foreign funds. A domestically-driven economy makes it more resilient to Donald Trump's tariffs, while the government has demonstrated strong fiscal Bloomberg Economics Says...'India's federal government has rapidly shrunk its fiscal deficit - caused by a stimulus blowout to address the Covid pandemic. It's set to hit its goal of lowering the budget deficit to below 4.5% of GDP in fiscal 2026 and further out aims to cut the federal debt as a share of GDP without committing to any growth-reducing deficit targets.'— Abhishek Gupta, senior India economist 'What international investors like about India's bond market is similar to the reasons that they like the Chinese bond market — because of its own individual policy making, more domestically-focused economic activities,' said Yifei Ding, fixed-income portfolio manager at Invesco Hong Kong Ltd. 'Given the size of the Indian economy and the size of the Indian fixed-income markets, it's not difficult for India to see high single digits foreign ownership in its government bond space,' Ding funds only take up 3% of the nation's $1.3 trillion sovereign bond market, compared with 5.8% in China, as of the end of May, according to Bloomberg calculations of official next milestone will be in September, when FTSE Russell begins to include Indian debt into an emerging-market index. Meanwhile, Bloomberg Index Services Ltd. already started adding rupee notes in one of its gauges in January over a 10-month period. Bloomberg LP is the parent company of Bloomberg Index Services, which administers indexes that compete with those from other service providers.
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Business Standard
26-05-2025
- Business
- Business Standard
Shorter Indian bonds set to gain further on RBI's record dividend payout
India's shorter-tenor bonds are set to extend their outperformance as analysts expect the central bank's record dividend payout will further boost the cash surplus in the banking system. The Reserve Bank of India approved a record dividend payout of ₹2.69 trillion ($32 billion) on Friday. This payout is expected to boost liquidity for lenders as the government utilizes the funds for expenditure. Nomura Holdings Inc. anticipates the yield curve to steepen further, with the spread between 5-year and 10-year government bonds likely widening to around 50 basis points from the current 34 basis points. 'We expect this steepening trend to continue, and prefer to be long five-year bonds,' said Nagaraj Kulkarni, co-head of Asia rates (ex-China) at Standard Chartered Plc in Singapore. Indian shorter-maturity bonds have outperformed longer notes on expectations a large dividend payout will likely prompt the RBI to cut down on its open-market debt purchases, which have focused mainly on longer-duration securities. IDFC FIRST Bank Ltd. now expects additional purchases of ₹1.6 trillion to be pushed back to the fiscal second half. The yield on the five-year note has declined more than 50 basis points since April 1, outpacing the 33 basis-point decline on the 10-year note. Still, not all are convinced that the outperformance will extend. Bandhan AMC Ltd.'s head of fixed income Suyash Choudhary predicts the steepening may have run its course and the duration segment may relatively perform better. Banking liquidity swung to a surplus of ₹1.6 trillion as of Friday, from a deficit of as much as ₹3.3 trillion earlier in the year, driven by the RBI's debt purchases that have exceeded its Covid-era levels. The dividend payout will push core liquidity, which includes the government's cash balances, to a Rs five-trillion-surplus, according to Nomura.
Business Times
09-05-2025
- Business
- Business Times
Foreign banks sell record Indian sovereign debt as tensions rise
[NEW DELHI] Foreign banks sold a record amount of Indian government bonds on Thursday (May 8), as a growing border conflict with Pakistan weighs on investor sentiment. They sold a net US$1.2 billion of the debt, a high according to data from the Clearing Corp of India going back to 2006. The move signals growing concerns over how escalating hostilities with Pakistan may impact markets, even as expected interest rate cuts from the Reserve Bank of India provide some cushion for investors. It's also putting a dent into the nation's appeal as a relative safe destination amid global trade uncertainties. 'While macro fundamentals in India are supportive of Indian government bonds, the near-term sentiment, and flows will depend upon the India-Pakistan developments,' Nagaraj Kulkarni, co-head of Asia rates (ex-China) at Standard Chartered, said. The bank is still holding on to its recommendation to buy five-year government bonds, he said. Indian stocks and bonds fell for a second day. The yield on the benchmark 10-year note, which had slid nearly 30 basis points since an RBI rate cut in February, advanced about nine basis points in two days. The rupee was little changed after its worst decline since 2022 in intraday trading on Thursday. The developments over the past few days reversed recent gains in Indian bonds that were driven by the central bank's cash injections and interest-rate cuts. Still, going back to previous incidents, the border skirmishes rarely had any long-term impact on Indian markets. The conflict will likely increase risk premiums, though the situation is unlikely to escalate out of control, Kaushik Das, chief India economist at Deutsche Bank in Mumbai, wrote in a note. He expects the central bank 'to intervene to contain volatility.' The RBI doesn't expect wild swings in the rupee but is ready to use foreign reserves to preserve currency stability as tensions with Pakistan escalate, according to people familiar with the matter. BLOOMBERG
