After Reserve Bank’s higher-than-expected rate cut of 50 bps, foreign investors have pulled out around Rs 2,766 crore from Indian bonds that are part of global bond indexes, likely owing to the narrowing spread with US bonds, as uncertainty over rate cut peaked out.
According to the Clearing Corporation of India (CCIL) data, foreign investors’ investment in Indian bonds in Fully Accessible Route (FAR) stood at Rs 2.76 lakh crore as on June 11 as compared to Rs 2.78 lakh crore as on June 6.
The major reduction in foreign investors’ holding was seen in the 7.38% 2027 bonds - at 11.47 percent as on June 11 - compared to 12.80 percent on June 6. Similarly, foreign investors reduced their holdings in 7.06% 2028 bonds to 15.20 percent as on June 11, compared to 15.45 percent as on June 6.
FAR enables non-residents to invest in specified Government of India dated securities without any investment ceilings.
Currently, the spread between India and US bonds stands at 187 bps, which is one of the lowest.
Usually, when the spread - or gap between yields in bonds issued by two countries - narrows, foreign investors pull back their funds from emerging economies and park it in less risker destinations. This is because when the differential is lower, foreign investors end up earning lower returns, as it gets adjusted with the currency exchange rate and other expenses related to compliance.
Further, the RBI in its June policy reduced rate by 50 bps to support growth after two successive cuts of 25 bps each in February and April 2025. The rate cut by the RBI MPC, third in a row, comes in the wake of the government releasing the GDP numbers for the fourth quarter as well as full year of 2024-25.
RBI’s Governor Sanjay Malhotra also announced a 100 bps CRR cut to be effected in four equal tranches of 25 bps starting from September 6, October 4, November 1 and November 29, this year. With the CRR cut, there is growing expectation that the liquidity in the banking system should remain in surplus for rest of the year, keeping bond yields at lower end of the curve.
This could also keep spread between both countries in a narrow range, and may also lead to more outflows from bonds, experts have said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
