Foreign banks have emerged as the largest investors in India’s trillion dollar sovereign bond market in recent weeks, attracted by the nation’s economic prospects and a stable currency.
They’ve bought more than 500 billion rupees ($6 billion) of debt since June 1, according to data from the Clearing Corp. of India. That far exceeds about 200 billion rupees of net inflows into index-eligible bonds in the period, and suggests global banks that typically buy as clients’ custodians have also been snapping them up for their own accounts.
The scale of purchases by these custodian banks, such as Deutsche Bank AG and HSBC Holdings Plc, reflects their optimistic outlook on India, following its inclusion into JPMorgan Chase & Co’s emerging-market bond index at end-June. Additionally, the inflows were bolstered by election results that reinforced political continuity.
“Banks were possibly running light going into the election, and after the results, they covered those short positions and have since gone long,” said Nitin Agarwal, head of India trading at Australia and New Zealand Banking Group Ltd. “Macro fundamentals also remain strong for India.”
The rise in demand is also because of a popular derivative trade between banks and insurers called the bond-forward rate agreement, according to Agarwal. The strategy helps insurers lock in longer-term yields without having to take on more debt on their balance sheets. Banks charge a margin to hold these bonds until maturity.
Foreign banks bought local bonds on a net basis for all but four days in June, according to data from the Clearing Corp. In contrast, state-run banks, mutual funds and private banks have all been net sellers.
India’s inflation is trending lower and is expected to average 4.5% in the fiscal year through March, opening up the possibility for rate cuts, Parul Mittal Sinha, head of India financial markets at Standard Chartered Plc., said on Bloomberg TV Friday.
“As and when the global yields start moving lower, and if the RBI also starts cutting rates, the intensity of inflows might pick up,” she said, referring to the Reserve Bank of India. “Capital gains are just around the corner. We are very optimistic.”
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