Indian sovereign bonds are on course to record their first monthly outflows since being included in JPMorgan Chase and Co.’s flagship index, given the narrowing yield differential with Treasuries.
Overseas investors reduced their holdings of so-called Fully Accessible Route, or FAR bonds, by 77.3 billion rupees ($910 million) up to Nov. 28, according to Clearing Corporation of India Ltd. data.
Foreigners’ appetite for local debt waned after Donald Trump’s election win stoked speculation of higher US inflation and pushed up the dollar, given the President-elect’s plans to impose tariffs around the globe. Besides, the Federal Reserve has signalled it won’t be in a hurry to lower rates, keeping US yields elevated.
The yield gap between India’s and the US’s benchmark bonds dropped to 2.39 percentage points earlier this month, the narrowest in just over a year.
“Following the Trump victory, there were expectations of dollar strength coming back and maybe rate cuts getting pushed away,” said Ashhish Vaidya, head of treasury at DBS Bank Ltd. in Mumbai. “As long as the US rates are reasonably attractive, flows into emerging markets will be a little scarce to come.”
The recent selling of local debt by global funds comes after JPMorgan’s September 2023 announcement to include Indian bonds into its emerging market index in June sparked a gush of overseas buying. Foreign holdings of index-eligible bonds have more than doubled in the last year to 2.4 trillion rupees.
While the relative stability of the rupee driven by central bank interventions and economic growth prospects bode well for Indian bonds, global investors may prefer to stay on the sidelines until there is clarity on Trump’s economic policies.
Hedging costs have risen by about 75 basis points since September, reflecting a tightening yield gap between rupee and dollar rates, weighing on the appeal of index-eligible bonds, Morgan Stanley analysts, including Nimish Prabhune and Gek Teng Khoo, wrote in a note.
“Active inflows are unlikely to revert to pre-October levels between now and year-end until UST yields, USD and the prospective US administration and policies settle into a new equilibrium,” they said.
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