Foreign investors expected to step up Indian bond purchases in H2 as rate cuts close in
By Dharamraj Dhutia
MUMBAI, Sept 30 (Reuters) -Foreign investors are expected to be more aggressive in their purchases of Indian debt in the second half of this fiscal year amid strong macroeconomic fundamentals, with potential domestic rate cuts also boosting appetite.
India is scheduled to sell bonds worth 6.61 trillion rupees ($78.96 billion) during the October-March period after it sold 7.40 trillion rupees of debt from April to September.
Foreign funds bought debt worth 718 billion rupees in the first half of fiscal 2025, according to clearing house data, and investors expect purchases to jump by up to 40% in the second half.
India's fiscal year runs from April 1 to March 31.
"We anticipate continued robust inflows. Over the next six months, we expect an additional $10 billion-$12 billion, driven by increased investor confidence and attractive yield differentials compared to other emerging markets," said Manish Bhargawa, CEO at Straits Investment Management.
The U.S. Federal Reserve began its interest rate cutting cycle with a 50-basis-point (bp) reduction in September and markets expect a similar easing in November.
Investors, who did not expect the Reserve Bank of India (RBI) to cut rates in 2024, now anticipate a reduction sooner rather than later.
"As of now, my sense is a 25 bps cut in 2024 and 50 bps max in 2025. Inflation would have bottomed out globally by then," said Ashhish Vaidya, managing director and treasurer of global financial markets at DBS Bank India.
Rate cuts are expected to boost foreign purchases, with investors preferring the mid- to long-end of the Indian bond yield curve, according to Straits Investment's Bhargava.
"Bonds with maturities in the 5-10-year range offer a favorable balance of yield and duration, benefiting from potential rate cuts and stable economic conditions."
Foreign investors purchased Fully Accessible Route (FAR) bonds - those included in JPMorgan's emerging market debt index - worth $18 billion since the announcement of the inclusion in September 2023.
"Whatever inflows we have seen already are just the start and I expect more to come in. My sense is foreign investors are still a bit underweight and need to get to neutral considering the weight in the index," DBS' Vaidya said.
India's weight on the JPMorgan index will rise to 10% by March 2025.
($1 = 83.7760 Indian rupees)
Foreign inflows in Indian government bonds in 2024 https://reut.rs/3VDmrON
Reporting by Dharamraj Dhutia; Editing by Swati Bhat and Sonia Cheema
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