India bond market foreign holdings fall to four-month low amid outflows

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Highlights

Foreign investors sold a net 52 billion rupees ($546.3 million) of India bonds via the fully accessible route in October, reducing foreign holdings to 3.57 trillion rupees, the lowest since June.
Surging Brent crude prices, up nearly 12% in October, rising U.S. Treasury yields, and the Reserve Bank of India's first rate hike in almost four years elevated India’s 10-year bond yield by 30 basis points and weighed on bond demand.
Despite improved structural inflow outlooks after tax reforms, investors like Invesco and PIMCO remain cautious short-term but constructive long-term due to India’s growth and better market access.

October selling deepens pressure on index-eligible debt

As reported by Reuters, overseas investors sell a net 52 billion rupees, or $546.3 million, of bonds under India’s fully accessible route in October, after selling 106 billion rupees in September, according to clearing house data.

The fully accessible route allows unrestricted entry and exit for foreign investors, and the securities covered under it are eligible for inclusion in three global emerging-market bond indexes. Foreign holdings in those notes fall to 3.57 trillion rupees, the lowest since June 17.

Norbert Ling, head of fixed-income portfolio management for Asia-Pacific at Invesco, says the firm remains broadly neutral and cautious in the near term. He says elevated oil prices, spillovers from developed-market yields, uncertain foreign flows, potential Reserve Bank of India liquidity absorption and additional government bond supply justify caution.

Rate outlook and global yields cloud demand

Brent crude rises nearly 12% this month to near $115 per barrel after jumping more than 14% in September, while the 10-year U.S. Treasury yield rises more than 25 basis points over the past two months. At the same time, the Reserve Bank of India raises its policy rate earlier this month in its first such move in almost four years and signals more increases ahead.

The rupee remains weak and India’s 10-year bond yield jumps almost 30 basis points in October, adding to pressure on demand. Although foreign investment surged in June after authorities announced tax relief and eased investment flexibility, some investors now say that earlier optimism is already reflected in valuations.

Stephen Chang, managing director and Asia portfolio manager at PIMCO, says the structural outlook for inflows improves after tax reforms increase the realised rate differential available to international fixed-income investors. Even so, investors remain constructive on Indian debt over the long term because of robust economic growth and improved market access, with Invesco saying it would prefer to add duration during periods of externally driven weakness.

In our earlier article on the RBI’s intensified rupee-defence efforts, we explained that the central bank had drawn down an estimated $75–$80 billion from its special FX measures introduced in June via spot intervention and dollar-rupee swaps. We noted that elevated oil prices, higher U.S. Treasury yields and ongoing outflows were tightening the squeeze on the currency, prompting additional steps to curb dollar demand and raising questions about how much firepower the RBI has to stabilise the rupee if pressure persists.

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