Indian bonds suffer biggest outflows since index addition

A more hawkish Indian central bank is also expected to cap the returns from local bonds. Reserve Bank of India chief Shaktikanta Das has pushed back against rate cuts after inflation accelerated to the quickest in 14 months in October.

Overseas investors are cutting their holdings of Indian bonds at the fastest pace since at least June as rising US yields sap the appeal of the Asian nation’s fixed-income securities.

Global funds sold a net Rs 4,960 crore ($588 million) of the so-called Fully Accessible Route debt last week, according to Clearing Corporation of India Ltd. data. That’s the biggest weekly outflow from the securities since they were included in JPMorgan Chase & Co.’s largest emerging-market bond index in June, according to Bloomberg calculations.

Offshore investors have also been selling Indian stocks on concern the economy is slowing. They have offloaded $2.7 billion of local shares in November, boosting the total for this quarter to $13.6 billion.

The allure of Indian bonds has diminished as US Treasury yields have jumped since Donald Trump’s election victory, with traders betting the Federal Reserve will have to slow down its easing cycle as Trump’s economic plans add to inflationary pressures. The extra yield on India’s 10-year debt over similar maturity Treasuries shrank to about 243 basis points Monday, close to the lowest in more than a year.

“The Indian bond market has substantially outperformed the US and European government bond markets over the past year, but the spread between India and both global markets has reached historically tight levels,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA.

A more hawkish Indian central bank is also expected to cap the returns from local bonds. Reserve Bank of India chief Shaktikanta Das has pushed back against rate cuts after inflation accelerated to the quickest in 14 months in October.

Still, further selling may be tempered as JPMorgan is looking to boost India’s weighting in its key bond index to 6% at the end of November. Both Bloomberg and FTSE Russell are planning to add the country’s bonds to their respective emerging-market gauges next year.